Gold is one of the precious metals whose value increases when stored for some time, which is why the investment portfolio of many traders contain it. Investors need to consider some factors that can influence the price of gold before adding the asset to their portfolios.
Investing in gold is safe for you if you will withhold it for a long time, however, if you are a short investor, knowing how gold works is paramount before moving into the market. Just like every other investment, gold trading is risky, which implies that there is the possibility of investors making losses or gains. If you want to invest in gold, you need to know the factors influencing its price, as explained in this guide.
5 Factors Influencing the Gold Price
Below are some of the factors influencing gold trading and its price:
- Supply and demand
- Currency movement
- Investment demand
Supply And Demand
The law of demand and supply affects all goods or services such that when the price of a good or service is high, the quantity demanded is low, and when the price is high, the quantity supplied is high too. This means that the market value of gold depends on the interaction between supply and demand, the value of gold rises when there is more demand. However, when the supply of gold increases, the price of gold reduces. The government reserves of a country affect the gold supply, which will fall when RBI decides to purchase more gold. However, there will be an increase in the gold price if there is no change in demand.
When the price of goods and services increases, it will affect gold trading and its market price. Although it is not absolute, most times, the price of gold seems to increase when there is a high inflation rate, but when the rate is low, it weighs on gold. There is an expansion of the supply of money by federal reserves whenever the country’s economy is experiencing growth and expansion due to inflation. Due to the expansion, which makes the value of the money circulating dilute, it becomes more costly to purchase gold. Recently, there has been no major increase in the value of gold due to the lack of inflation. Also, the lending rates do not increase since there is no inflation, thus holding the gold price.
Another significant factor impacting gold prices is currency volatility, particularly the movement of the U.S. dollar. Since other currencies and products worldwide rise in value as the dollar falls, a declining U.S. dollar has a propensity to drive up gold prices. On the other hand, a stronger U.S. economy frequently makes the U.S. dollar strong. Since gold and the U.S. dollar have an antagonistic relationship, the price of gold reduces when such happens. The increase in gold value as of 2016 is a result of a declining U.S. currency.
Gold trading can occur in several ways, with exchange-traded funds (ETF) being one of the most popular ways to invest in gold. ETFs can be owned and traded not only by private organizations but also by mining firms. They operate similarly to trusts and stocks because their trading occurs on exchanges. The market price of gold becomes affected by the fluctuations in the price of the exchange-traded funds when in demand since the investment entities have large gold holdings. There is a continuous market expansion for ETFs, and they are relatively prevalent, particularly in America.
Uncertainty is another factor that affects gold trading since the possibility of predicting future events becomes hard, and many investors prefer to be safe rather than take risks. The economy’s condition has a little negative effect on the price of gold. Thus, many investors invest in it to avoid losses during inflation. Although it might be challenging to quantify the effects of uncertainty, it can affect market prices. The expectation is that the value of gold will increase during a recession, whereas other investments like bonds, equities, and real estate are likely to crash. Other uncertain events that can disrupt the market prices are political instability and war.
Despite gold being the precious metal with the most stability in price, its price is not free from change. Some of the factors responsible for its price change are discussed above, and every investor needs to know them before starting gold trading—understanding how precious metals like gold function is a prerequisite for becoming a good all-around investor.