What Drives Gold's Price
August 27, 2014 [...]
A number of factors move gold's price up and down. Once you understand which are the key ones that influence the shiny yellow metal's price, you will be able to determine the best times to buy (or sell) much easier.
Oddly, gold's price isn't simply driven by the supply-demand ratio, the market's way of functioning is far more complex and less transparent.
Although, the purchase of physical gold does influence the market and so do the costs of production, these are just part of the mix.
1. The dollar's movements: when we measure gold's price, we do it in general in terms of US dollars; so, when the dollar weakens, we say gold has become expensive and vice-versa - but it's quite often just a reflection of the US economy's oscillations
2. Stock markets: there are links between the stock markets and gold's price - traders frequently "travel" between assets from stocks to commodities, buying and selling, this also has an impact on gold's price
3. ETF's, futures contracts, "paper gold": not all that shines is gold and, not all "gold" is gold - gold certificates are being traded on the commodity markets just as if they were solid gold (bought and sold), this naturally moves the price of gold
4. Oil's price: gold tends to move roughly parallel with gold - when oil prices go up, you can expect higher gold price etc.
5. Gold's production cost: the rarer gold gets, the more effort needs to be put into its production, making it more expensive to produce (naturally, the price of gold climbs on the markets)
6. Inflation: currency devaluation tends to implicate higher gold price (but not always, as the other factors also have a strong influence); people tend to buy gold as a hedge whenever currencies devalue
7. Physical gold demand: bullion, jewelry, industrial demand (very low) are often seasonal, people turn to gold as a hedge against currency devaluation, as a means to save or other reasons
8. Geopolitical events: conflicts and political tensions, even mere declarations strongly influence gold's price - generally gold get more expensive during times of negative political events
9. Interest rates: the higher the interest rates are, the higher the cost of owning gold is (and people reluctantly tend to currency, which at least seemingly brings higher yields - at least in nominal terms)
10. Fear, panic: the markets are generally moved by fear and greed - in gold's case, fear is generally either of financial nature (loss of confidence in currencies) or of geopolitical nature
11. Greed: once gold earns the reputation of a good yielding asset or a safe-haven assets, others will enter the market to buy, therefore the price soars as a result
Hopefully these 11 factors will be of use to you in order to understand the way gold's price oscillates.
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