Many factors influence the price of gold in the world’s markets.
For example, one of the major determinants of gold prices is the value of the US dollar. As a general guide, when the US dollar rate falls relative to other currencies, prices for gold tend to rise. This is because investors buy gold as “insurance” to protect their other assets which are priced in dollars.
Supply and demand
As with any other commodity, the price of gold can be dramatically affected if either the supply available or the demand on the open market rises or falls unexpectedly. Compared to other physical commodities, gold is in relatively short supply.
GOLD FACT: the global supply of gold increases by just 2000 tonnes every year – by comparison, steel is produced at a rate of over 10,000 tonnes per hour in the United States alone.
World events play a major part in determining the price of significant commodities. Perhaps the most widely recognised example of this is the price of oil, which rises sharply when supply is potentially endangered in cases of war (such as Iraq’s invasion of Kuwait in 1990 or the US-led invasion of Iraq in 2003).
At such times of uncertainty that threaten equity prices across the board, many investors buy gold as a “safe haven” for their money, so the price of gold rises accordingly.
Investors are always looking for the best return on their investments. When interest rates are high, they may get a good return on their interest-bearing bonds and other investment vehicles, whereas buying gold does not give them any income in the form of interest. In general, when interest rates fall, then prices for gold will rise, although even this rule has its exceptions.
One thing is certain – predicting gold prices is notoriously difficult.
“I only know of two men who really understand the true value of gold – an obscure clerk in the basement vault of the Banque de Paris and one of the directors of the Bank of England. Unfortunately, they disagree”. Baron Rothschild
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