Factors that Drive Gold Prices

Investors mostly resort to gold in times of economic and political instability. There are many reasons for this, although you can always buy this precious metal. In times of crisis, people have traditionally sought a haven for their capital. This precious metal has a proven role in preserving value and protecting against adverse economic developments.

Adding some shine to your investment portfolio is always a good idea. The recommendation of investment advisors is to keep 5 to 10 percent of the assets in alternative assets. As the market becomes unstable, that percentage should increase up to 30% of your investment portfolio. But, of course, it will also depend on what other assets you have in it.

Find out more about the importance of good diversification at this link:

Gold is a relatively stable investment vehicle. It is actually the most stable if you compare it with other alternative assets. It also has jumps and falls in prices, but they are not drastic. Many factors affect the value of this precious metal, but their impact is not instantaneous. In fact, it can often be predicted.

Demand and Supply

The price of gold is affected by investment demand and market supply. The production has been relatively level over the last couple of years. The larger producers have much control over this precious metal’s price. But when they face an economic crisis, governments can cut this metal’s production to keep inflation under control.

Many countries have significant reserves of this precious metal. They sell it when negative financial trends hit them up. A minor part of this precious metal is available to individual investors. And when a lot of people want something they don’t have, it can easily lead to a significant price increase.

Many industries use gold as a raw material. For example, you can find it in electronics, computer components, pharmaceuticals, and many other products and devices. So there are indications that the demand for this asset will increase in the future because of its industrial usage.

Dollar Value

The US dollar is the standard for global trade and is considered a safe currency. As a result, most global transactions are conducted in this currency, and the prices of all raw materials are expressed in it. Because of this importance, many consider the dollar a modern substitute for gold.

But precisely, the relationship between gold and the dollar is another factor in determining the price of this precious metal. As a dollar-denominated asset, this alternative asset tends to move in opposition to this currency. Simply, you can buy more of it when the US dollar is weak due to their inverse relationship.

This precious metal benefits from the value drop of the US dollar and the instability of other currencies such as the Chinese yen, the British pound, or the Russian ruble. It’s not likely that this precious metal will be used as a means of payment ever again. But it’s still the best method for wealth preservation.

Inflation Rate

A recent study shows that rising inflation is one of the leading indicators of gold prices. For example, price growth, interest rate changes, and industrial innovations are all factors that affect gold prices. High inflation tends to push these prices up, while low inflation will lead to lower rates. That makes it an excellent time to buy this precious metal if you can afford it.

Rising commodity rates are pushing inflation up. That’s another reason for investors to buy gold as protection against this negative economic trend. This further causes boosted demand for this precious metal—finally, its market price increases. At any time, you can use a gold price calculator to make a well-informed decision.

Monetary Policy

Central bank decisions, political crises, and stock indices are all factors that affect gold prices. For example, the Federal Reserve expands the currency supply when an economy grows. As a result, the value of existing monetary notes falls, making buying and selling gold more expensive. But when the economy is experiencing strong growth, the price of this shiny metal will likely rise.

Once the value of money was determined by the amount of gold that could be bought for it. That’s no longer the case, but currencies rely on monetary policy and economic trends. It means that countries can increase or decrease the amount of money in circulation, regardless of the amount of gold they hold. It gives them more freedom but carries high risks of inflation or deflation.

Interest Rate

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Real interest rates are also a major factor in gold prices. While this precious metal has an advantage over lower real interest rates, these factors are not entirely related. As interest rates rise, people will often sell their gold to free up money for other investments. On this link, see what happens when interests are on the rise.

If low-risk investments give higher interest rates, the opportunity cost of holding gold is higher. So you give up higher interest rates and opt for preserving your funds in this precious metal. Also, as interest rates decrease, the price of this asset tends to go up. That’s because higher interest rates mean a lower opportunity cost for investors.

There are pros and cons to having gold in your portfolio. This decision will depend on the investor’s preferences and financial goals. It’s good to know that this precious metal is a volatile asset, as many factors influence its price. But seasoned investors can usually predict their impacts and prepare their tactics for upcoming market events.

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