Several Factors Can Influence The Price Of Gold
Gold has long been a highly valued precious metal. Humanity’s connection and arguable obsession with it stretches back thousands of years to the dawn of civilization. Not only is it relatively rare in terms of available surface metals, it also is aesthetically pleasing, and its inherent properties also give it functional value to many electronic components and devices. There are even food and beverage companies who will infuse trace amounts of gold foil in specialty products to boost their perceived value.
All of these factors and more help gold remain relatively stable in price as a tradeable commodity. Indeed, it is valued throughout nearly every international market and exchange.
Yet as valuable and potentially stable in price as gold can be, there are still several factors that can influence the market price of gold. Understanding, these contributing factors can go a long way toward helping you decide just how much or how little you want to invest in gold as a commodity or in a physical capacity, given certain conditions.
Federal Reserve’s Monetary Policy
The United States Federal Reserve serves as the central banking system for the United States of America and in some ways serves as a financial backstop for times of economic distress. As such it has a tremendous amount of influence on the economy and the market value of many commodities.
They also set and influence interest rates which can significantly influence the price of gold per ounce through a somewhat complicated factor known as Opportunity Cost. This principle is related to the concept of surrendering a secure and guaranteed profit in one investment at the risk of a potentially higher net profit in another.
Currently Federal Reserve interest rates remain very low, the same is true for bonds and CDs. This means that they provide minimal returns compared to the national inflation rate. The end result tends to provide minimal capital gains at the risk of real money losses.
In economic conditions such as this gold becomes an increasingly attractive investment opportunity. At the same time, possible increases interest rates can boost opportunity costs higher, which could potentially drive investors to forgo gold since they’d be netting a possibly higher return.
It’s also worth noting that Federal Reserve occasionally issues commentary which can also have an impact on the market and the price of gold. The Federal Open Market Committee periodically discusses the health of the United States. economy and how it might influence monetary policy.
If their assessment and following statements imply that interest rates might rise, in the near future, it could cause the price of gold to go down. On the other end of the spectrum if the Federal Open Market Committee releases a statement implying that rates could decrease or hold steady, it will likely encourage the price of gold to increase.
The Influence Of Other Economic Reporting Information
The United States Government also issues statements related to other economic factors which can sway the price of gold. This can include things like the jobs report, updated wage data, quarterly manufacturing statistics, and large-scale economic factors such as growth in the United States Gross Domestic Product.
In general signs of economic strength such as low unemployment rates, positive jobs growth statistics, manufacturing expansion, and GDP growth that exceeds a 2% projection can also lead to a decrease in the price of gold. These conditions often hint that the Federal Reserve is contemplating tighter monetary policy changes which could also affect Opportunity Cost.
However, if these statistics and reports indicate things like weaker jobs growth, increasing unemployment, a decline in manufacturing productivity, or a decrease in GDP can hold any changes in interest rates which would further increase the value of gold.
Simple Supply And Demand Can Influence The Price Of Gold
While it might seem like it’s straight out of a high school Econ book, the basic market principles of supply and demand can also influence the price of gold. Just like with any other product or service an increase in demand while supply remains limited or otherwise constrained will inevitably increase the price. At the same time, a surplus of something with a weak demand depresses prices lower.
Gold also plays a functional and aesthetic role in different places around the world. In some cultures, such as India adornments, accents and jewelry made from gold plays a role both in accenting appearance as well as providing a potential physical investment.
On a functional level, some manufacturers who produce solid state, low voltage electronic devices prefer to use gold as it is a superior conductor of electricity and is not vulnerable to tarnishing or corrosion. At the same time, gold mining and production worldwide remains rather limited, which can again influence the law of supply and demand.
Inflation Can Also Impact The Price Of Gold
Inflation is a term used to indicate the widespread rising price of goods and services. Inflation also tends to indicate that the value of the dollar is weakening which generally tends to push gold prices higher. If the economic conditions show a strengthening dollar it can decrease the relative price of gold.
When the economy shows signs of sustainable growth the Federal Reserve is more likely to expand the money supply. Of course, this decreases the value of existing notes that are currently in circulation, which in turn increases the cost of goods and commodities such as gold. In the past quantitative easing programs designed to expand the money supply were seen to have a positive effect on the price of gold.
Throughout the first half of 2018, gold remained high. Even with some minor market fluctuations it still averaged just over $1350 per ounce. However, the third quarter and the start of the fourth quarter has seen the price of gold decrease to around $1200 an ounce.
Movement Of Currency
The price of gold is denominated by the United States Dollar. As the value of the dollar decreases, it tends to increase the price of gold throughout foreign and domestic markets. As the dollar grows stronger it tends to have the reverse effect and pushes the value of gold lower.
Electronic Traded Funds
Electronic traded funds, which are more commonly referred to as ETFs can sometimes have an impact on the price of gold. In general ETFs don’t tend to make a major impact on the market, yet they also shouldn’t be overlooked when considering gold!
They are essentially a conglomeration of funds that investors can purchase to increase their liquidity, or to help diversify their risks over a broad range of assets at a minimal-to-modest cost. Large gold EFT’s essentially purchase physical bullion based on investor demand. Whenever investment demand for gold changes it also has the potential to influence the purchasing and selling activity of ETFs.
Market Uncertainty And Speculation
It should come as no surprise that instability in the world, especially in key regions rich in certain resources and commodities, can also cause instability or rampant speculation in international markets. This could be something polarizing as political instability, military conflicts, or something unavoidable like a natural disaster that affects a major area.
The trouble with these uncertain events is that they don’t tend to come with a lot of immediately quantifiable statistics. There are often many factors that contribute to gold price changes from these broad-reaching incidents, including the psychology of investors.
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