For almost 3,000 years, wealth has been stored in gold. It is primarily due to the fact that gold is extremely scarce and becoming difficult to find and mine nowadays.
Compared to silver, gold is 18 times rare, and six times rarer than platinum. Furthermore, gold is very hard to destroy. Gold is resistant to oxygen and hydrogen sulphide. Therefore, it doesn’t rust, deteriorate or degrade. Gold also doesn’t melt at temperatures lower than 1,063°C. Only cyanide can dissolve gold.
It’s getting tougher and harder to find fresh gold deposits after centuries of gold mining. As on 2022, Africa is the world’s largest regional gold producer, accounting for some 27 percent of global gold production. Country-wise, China is the highest producer with 378.2 tonnes annually, accounting for around 10 percent of global gold production.
What drives gold price
The factors influencing the price of gold might be contradictory and perplexing. While supply and demand mostly determine the price of other commodities, the psychological aspects of economic downturns frequently impact gold prices. It’s critical to understand how these and other elements affect the price of gold.
Factors affecting gold prices
Gold is an in-demand asset and various factors drive its price:
Supply, demand and new discoveries: The world’s gold supplies increase gradually, by about 1.6 percent year. In addition, demand is typically quite high, either for practical reasons or as a wealth store, which helps sustain prices. Although fresh discoveries of gold mining can influence prices, new discoveries of gold deposits are generally relatively rare. Presently, over 75 percent of the world’s gold supply comes from mining, according to Markets.com, a digital forex and gold CFD trading platform.
The US dollar: It is the foundation of the global gold trade. The metal has a US dollar price. Traders may find gold to be less or more appealing depending on how much the US dollar appreciates or declines in value. For instance, a declining value of the dollar might be advantageous for traders wishing to purchase gold using other currencies.
Interest rates: Gold prices may fall when interest rates are high. This is so that traders may explore other assets such as equities or fixed-income assets in order to gain. It’s applicable the other way also. Because gold is a safe haven for traders who want to protect their wealth during uncertain economic times, its price could rise when interest rates are low.
World economy: The influence of global economy on fluctuations in gold prices may be viewed as an extension of the impact of interest rates. Gold prices might rise in response to global economic downturns. It is mainly due to its reputation as a safe haven for wealth storage. For instance, at the onset of the COVID-19 epidemic, prices increased by 13 percent.
Practical usage: It’s important to remember that gold may be used for more than merely accumulating money. Gold is a key component in numerous sectors, including electronics, engineering and jewellery. Gold prices might, therefore, increase during periods of high demand for these companies’ products, which are often times of prosperity due to their upscale character.
U.S. dollar’s influence on gold
As a foreign exchange reserve, gold is owned by all countries in the world. U.S. dollars are used to price gold on international markets. The U.S. dollar serves as an alternative to gold for pricing, which explains why there is so much interest in the connection between gold and the U.S. dollar. The U.S. dollar and gold have an inverse relationship. The value of other nations’ currencies rises as the U.S. dollar declines compared to them, which boosts demand for commodities like gold. The price of gold rises in response to increased demand.
It is commonly believed that there is an inverse relationship between the price of gold and the U.S. dollar. However, this isn’t always the case. There have been times when gold and the U.S. dollar have increased in parallel.
The currency of a country gains strength when there is a rise in the demand for gold. A country’s currency will appreciate as long as it is a net exporter — that is, as long as exports exceed imports. On the other hand, the currency of a country will depreciate if it spends more on imports than what it earns from exports.
Read more: UAE gold prices rise, global rates up as investors eye Fed meeting minutes
Gold price mechanism
When describing the concept of fixing the price of gold, the two most important names to keep in mind are London Gold Fix and London Bullion Market Association.
The London Gold Fix was a system used to calculate the price of gold in U.S. dollars per troy ounce. In 2015, it was replaced by the London Bullion Market Association, or LBMA, gold price. The price is still fixed twice a day, at 10:30 and 15:00 London GMT, in U.S. dollars. The LBMA gold price serves as the global reference.
The resulting spot price (a price which appears on the market) is set by a consortium of financial institutions rarely differs from the LBMA gold price. The LBMA gold price is the same everywhere in the world, despite the fact that it can be defined in many currencies.
Risk in gold investment
Gold prices can be very volatile mainly because of geopolitical tensions, demand and supply, etc. Below are some quick factors:
- Price volatility: Gold prices are subject to fluctuations based on a range of economic variables, much like any other investment.
- No income: Gold does not yield dividends or interest, in comparison to equities and bonds.
- Storage fees: If you own physical gold, then you would need to pay for insurance and safe storage.
Future trends in gold price
Gold prices surged in the last few months of 2023 after a powerful rally was sparked by central bank purchasing and mounting investor concern over the Israel and Russia-Ukraine conflicts. A falling U.S. dollar and expectations of Federal Reserve rate cuts further boosted bullion prices, which hit a record high of $2,135.39/oz in December, as per a report by J.P. Morgan.
After a hiking cycle that pushed the Fed funds rate to its highest in more than 22 years, policymakers on the Federal Open Market Committee (FOMC) have indicated at least three rate cuts in 2024, as inflation eases from the 40-year highs seen in mid-2022. Gold prices are expected to dip in the near term before climbing to new highs later in the year, with a forecasted peak of $2,300/oz in 2025.
