There are a variety of factors that move gold prices. Let’s take a look at the most common factors.
- Monetary Policy
One of the biggest influences on gold prices is monetary policy and this is controlled by the Federal Reserve. Generally, interest rates have huge influence on the price of gold due to what is known as opportunity cost. This is the idea of giving up an almost-guaranteed gain in an investment for the potential of even greater gain in another investment.
- Supply and Demand
While this may often be an overlooked point, supply and demand economics can significantly influence the price of gold. As with anything, increased demand with low supply can pull prices higher. On the other hand, oversupply with weak demand can drive prices down. Be sure to check the latest gold bullion price before you invest.
Inflation can also impact the price of gold. Typically, higher or rising levels of inflation will push up gold prices, and lower levels of inflation will weigh on gold. Inflation tends to be a sign of economic growth and expansion which is usually happening when money supply is expanded. In turn, this dilutes the value of existing monetary notes, making it costlier to purchase assets that are thought to retain value, like gold.
- Currency Movements
Another strong influencer of the price of gold is the movement of currencies. For instance, if the U.S. dollar begins to fall, other commodities and currencies around the world increase in value, pushing gold prices up. On the other hand, when the U.S. dollar strengthens, it’s usually a sign of a growing U.S. economy. The U.S. dollar and gold prices usually have an inverse relationship.
- Electronic Traded Funds
The actions of electronic funds are a small influencer on gold prices, too. These funds are aimed at being market movers, but they still need mentioning. Electronic traded funds are known as basket funds that investors may purchase to allow for increased liquidity and the chance to spread risks over a larger number of assets for as little cost as possible. As the investment demand for gold fluctuates, so the price can be affected.
There is no single, particular factor that we can list here to perfectly encompass the uncertainty that moves gold. However, political instability is a strong example. Essentially, the stock market thrives on certainty which can be the enemy of gold prices. For instance, now quite knowing what Brexit will bring for the United Kingdom and Europe, who will become the next American president, and whether or not terrorism can effectively be dealt with, are all instances of factors that could contribute to global growth uncertainty and lead to an increase in the price of gold.
If you are keen to invest in gold bullion, do keep in mind that uncertainty is not a statistic that can quantified like the first 5 points. It’s a psychological factor, as such, that is investor-dependent and it can certainly differ from event to another.
Take note of the points we’ve discussed as it will help you to invest in gold wisely.