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The Mine

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What are the factors affecting gold prices?

How is gold priced? It’s a simple question, but an important one to understand if you plan to invest in gold or simply get a good deal on gold jewellery.

The price of gold isn't just based on the economy and gold's applications as a material; there are many other factors which play a part in dictating gold's perceived value.

Investors have long been enamoured by gold, which has seen the price of the metal increase substantially over time – particularly over the past 50 years. As with most commodities, supply and demand are incredibly important. Outside of this, however, gold manages to retain its value for other reasons.

Throughout this article, we explore the key factors affecting gold's supply and demand. We’ll also delve into what determines the value of gold and, in turn, the exact price it can command.

Value of the U.S. Dollar

When exploring exactly what affects gold prices, it’s important to acknowledge that the price of gold is generally inversely related to the value of the United States dollar.

The reason behind this is that the metal is “dollar-denominated”. That means, all else being equal, a stronger U.S. dollar tends to keep the price of gold both lower and more controlled. On the other hand, a weaker U.S. dollar is likely to drive the price of gold higher due to increasing demand.

This is because more gold is typically purchased when the dollar is weaker, which most commonly occurs throughout periods of inflation. As a result, gold is commonly seen as a hedge against inflation. Inflation occurs when prices rise, and by the same token, prices rise as the value of the dollar falls. As inflation ratchets up, so too does the price of gold.

Central Bank Reserves

Central banks always hold both paper currencies as well as gold in reserve. As national central banks diversify their monetary reserves away from their accumulated paper currencies and into gold, the price of gold typically rises. Through this process, many of the world's nations have reserves composed primarily of gold. This is understood to better guard against inflation and recession, since gold retains its value better than fiat currencies through unstable or unpredictable periods. Currently, the total central bank gold reserves comprise approximately 35,500 metric tons – roughly one-fifth of all the gold ever mined. The vast majority of this gold has been purchased within the last decade, indicating that this trend will continue over the next few years.

Of all the countries holding gold in their reserves, the United States, Germany, Italy, France, and Russia hold the largest quantities. The United States tops this list with a massive 8,133 metric tonnes, which is well over double what second-placed Germany holds. Global Jewellery and industrial demand.

Back in 2019, jewellery accounted for approximately half of the world’s gold demand, totalling more than 4,400 tonnes (according to the World Gold Council). The kingpin countries of India, China, and the United States are the three largest consumers of gold for jewellery by volume.

Another 7.5% of global demand is attributed to technology and industrial applications of gold. This includes its use in manufacturing medical devices (such as stents) and precision electronics such as GPS units. With this in mind, gold prices can be affected by the basic theory of supply and demand; as demand for consumer goods such as jewellery and electronics increases, the price of gold rises with it. This concept of supply and demand is what underlines the price of gold.

Inflation

Now more than ever, inflation is a relevant term when looking at the behaviour of stocks, currencies, and investment resources. Although we know inflation negatively affects fiat currencies, we’re also posed with the question: does gold go up with inflation? Inflation is definted by the rising price of goods and services, which is often influenced by geopolitical occurrences. During times of economic uncertainty, and as seen during times of economic recession, more and more people turn to invest in gold due to its enduring value.

This results in gold often being considered a "safe haven" for investors during turbulent times. When the expected or actual returns on bonds, equities, and real estate fall, the interest in gold investing commonly increases, which drives up its price. Gold can also be used as a hedge to protect against significant economic events, such as currency devaluation or inflation. While far from a guarantee, rising or higher inflation levels tend to push the price of gold higher. At the other end of the scale, lower levels of inflation (also known as deflation) weigh down on gold. For this reason, gold is heavily sought out, as opposed to fiat currencies, stocks, or real estate, as an investment option during difficult times.

Investment Demand

The fact that gold is a commodity causes it to behave differently from currencies or stocks, and gold’s unique qualities see it priced in a rather different manner. There are many different factors which play a part here, so let’s take a look at exactly how gold is priced.

On top of the public demand for it, gold also sees demand from exchange-traded funds, which both hold the metal and issue shares that investors can buy and sell. The SPDR Gold Trust (GLD) is the largest and held over 1,078 tonnes of gold as of March 2021.

Overall, gold purchases from various investment vehicles in 2019 were a whopping 1,271 tonnes, a figure which, according to the World Gold Council, represented over 29% of the total demand for gold for that year. Gold is also a popular asset within exchange-traded funds (ETFs), where it's both bought and sold similarly to shares. If you’re unsure about an “exchange-traded fund”, you can think of it as an investment vehicle in which investors can buy and sell commodities (such as gold) on a stock exchange – just like regular stocks.

Currently, ETFs represent a significant share of the total gold demand volume and, therefore, have a major impact on its per-ounce cost. Also worth noting is that, whereas some ETFs represent ownership in the actual metal itself, others hold shares of mining companies instead of the actual gold. Note that, at 7879, we do not deal with ETFs and that the gold you buy from us is real, authentic, allocated gold. There is absolutely nothing that stands between our clients and their gold.

Gold Production

The world's ability to produce gold (through gold mining) also affects the price of gold, which is another example of supply meeting demand. Some major players in the world’s gold mining industry include China, South Africa, the United States, Australia, Russia, and Peru.

The amount of gold mined back in 2018 was roughly 3,260 tonnes, which was a sharp increase from the 2,500 tonnes which was mined in 2010. Despite the rise over this ten-year period, gold production has not changed significantly since 2016. One big reason is that all of the "easy gold" has already been mined, and miners now have to dig a bit deeper or employ novel mining methods to access quality gold reserves. The fact that gold is now more challenging to access raises additional problems: miners are exposed to additional hazards, and the environmental impact is sharply heightened. In short, it costs more money to mine less gold, and these added gold mine production costs often result in higher gold prices overall.

Geopolitical Crises and World Events

The bottom line is that gold is considered a safer bet for investors. Because of this, its demand has been known to skyrocket in times of global crises or geopolitical disruption.

This particular precious metal outstrips all other assets in terms of economic viability and stability. This is due to a few reasons: gold's acquisition and production cost is rarely hit by significant fluctuations, the element is incredibly durable, and the supply is high enough to meet demand comfortably.

Because of this, it is likely that gold will always remain the fallback option every time economies turn for the worse. This scenario naturally increases the demand for gold, which can cause significant price spikes. However, those looking to invest shouldn’t be deterred by the rising cost of gold but should instead be encouraged by its “future-proof” nature. Considering the price of gold has increased a massive 25% over the last decade, there are many indications that the current climate will see it increase even more in the future. Now you’ve got a handle on what drives gold prices, you may think it’s a good time to start investing in gold. So, why not begin by investing in pure, 24-karat gold jewellery? Not only will you begin with a fantastic investment, but you’ll also receive a beautiful, timeless piece you can wear, resell, or pass down to future generations.

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