What Affects Gold Prices? Factors That Affect Gold Pricing

Ifyou’re considering investing in gold, you might be wondering what factors influence its price. Gold is notoriously expensive – as one of the most coveted metals globally, cultures around the world have treasured for millennia.

While investors view gold as a source of value, the precious metal also has practical uses. Whether in its use as jewelry, in technology, or for a range of other applications, gold has much more purpose than sitting in a secure vault.

Due to gold’s various applications, a variety of elements can affect its value at any given time. So, what affects gold prices? In this guide, we’ll take a look at ten different factors that determine the price of gold.

1. Gold’s Status as a Store of Value

If you’re considering investing in gold, you’re likely aware of its position as a “store of value.” For millennia, cultures around the world have used gold as a form of currency. At one point, the U.S. dollar was backed by the Gold Standard.

While most modern currencies no longer have a gold standard, the precious metal has retained its position as a financial asset. As long as investors view gold as a store of value, some type of force will be able to drive the price of gold upward.

2. Gold’s Technological Use

Gold can sometimes be useful in technology because it’s an electrical conductor that doesn’t corrode. You can even find gold in satellite technology. If future technologies develop that require gold, this will put pressure on the metal’s value to society and therefore, its price.

3. The Gold Supply

As with any asset or investment, part of what drives the valuation of gold is its scarcity. As introductory economics dictates, the harder it is to obtain a resource, the more likely that resource will rise in value. Since there is a finite amount of gold on earth, investors who want to access gold will need to compete with other investors to purchase it, and this competition forces the gold price upward.

Access to gold has become increasingly challenging. As gold mining has exhausted many of the easy-to-find gold deposits on earth, mining companies must dig further underground to access deposits. The harder gold is to find, the more likely the price will increase.

4. Uncertainty About Gold

Uncertainty can play a significant role in determining the price of gold and other precious metals. If investors are nervous about the geopolitical or economic landscape, they will sometimes flock to gold and other alternatives to keep their money safe. While this isn’t a foolproof investment strategy, it is interesting that gold prices can increase when investors become nervous about currency values and the cost of publicly traded equities.

Gold has long served as a “hedge” against risks on the financial market. Since many investors view gold as the original form of currency, it appears to be a safe haven when individuals are nervous about the economy’s condition.

To find out how uncertainty affects gold prices, look at the prices of gold throughout periods reflecting various economic or political issues. In many cases, you will see small spikes in price when people are uncertain about how the world’s economy is functioning.

5. Inflation and Gold

Inflation refers to a decrease in purchasing power, which typically occurs with a drop in the value of a currency in an economy, leading to increased prices. If a currency experiences inflation, then the price of gold can rise drastically.

With inflation, a nation’s currency will lose the ability to purchase as much gold. In these conditions, people are much more likely to invest in other assets to avoid the negative consequences of losing value with gold. The resulting “uncertainty” can lead to a rise in gold prices. If people don’t have confidence in fiat currency, they may start looking at precious metals and other traditional “stores of value.”

6. Strength of the U.S. Dollar

While the domestic purchasing power of the U.S. dollar can impact the price of gold, the standing of the U.S. dollar in the global currency markets is also a significant factor. If you keep your eyes on the worldwide FOREX markets, you will see real-time shifts in the U.S. dollar’s value against other currencies across the globe.

While shifts in the currency price might not have an immediate impact on your ability to purchase consumer goods, it can affect your ability to buy precious metals that investors buy and sell around the world.

For example, if the Canadian Dollar grows much more robust than against the U.S. Dollar, Canadian investors will be able to access gold for a more affordable price. While the U.S. Dollar is considered the world’s reserve currency, FOREX changes can still impact price.

7. Interest Rates

The changes in interest rates within a country can also influence the price of gold. When interest rates are low, investors often decide to place their money into various investment opportunities – including gold, silver, and other precious metals. If investors are concerned about low interest rates for keeping their cash in the bank, they’re likely to look elsewhere for better returns.

In most cases, national governments keep interest rates low to create investment opportunities within their economy. While most central banks may not be encouraging gold investments, many investors will look at precious metals as an alternative to keeping cash stagnant in a bank account.

Additionally, low-interest rates also correlate with the cost of capital. If an investor wants to borrow money to invest in gold, equities, or any other type of investment, they’re much more likely to do so if interest rates are low. Cheap capital can have an impact on any asset’s price, including gold’s.

8. Government Actions – Central Banks

While gold standards no longer back most world currencies, central banks worldwide will retain gold and other precious metals for financial security reasons. For example, the U.S. Central Bank has large deposits of gold.

The decision of central banks to increase their gold reserves can significantly impact the price of gold. Since governments have much more purchasing power than do individuals or companies, they become major players in the gold market.

While governments can also decide to mint gold coins, this is no longer affordable for typical currency. Today, they more likely use silver, nickel, copper, and other metals.

9. The Jewelry Industry

Be sure to remember that not just technology and investment drive the need for gold. Jewelry is another market that affects the global demand for gold. A type of metal that displays wealth and class, gold has been a significant material for jewelry since ancient times.

Archaeologists have found gold coins dating back to the 8^th century BCE in Asia Minor. They have placed the use of decorative gold to create political and religious objects such as crowns, statues, drinking vessels, and scepters, as well as jewelry, throughout the ancient world in places as distinct as the Scythian, Mycenaean, Egyptian, Etruscan, and Ancient Chinese civilizations in Europe and Asia and the Incan civilization in Peru as well as across South America.

In more recent centuries, gold has continued to serve as a popular and meaningful source for body decoration. Whether as a wedding ring, necklace, earrings, or in other forms, gold has remained a popular choice for both men and women worldwide.

As long as gold remains a desirable metal for people who want to wear fine jewelry, we will continue to see a great demand for gold and gold-plated items. The power of the jewelry market can have a significant impact on the perceived value of gold.

10. Other Types of Gold Investments

As investors become increasingly creative with how they invest in various markets, we now have financial products that offer gold investment without the need for holding or storing bullion. Many modern investors don’t want the hassle of purchasing and storing physical gold, so these investment vehicles provide a convenient and accessible way to invest in the world’s most precious metal.

For example, many gold ETFs will allow you to invest in gold without the complications of buying and storing physical gold. Some gold ETFs are focused on investing in gold mining companies, so make sure to avoid these types of ETFs if you’re searching for a way to invest in the price of gold, since investing in gold-mining companies doesn’t mean you’ll make money if the cost of gold increases.

It’s Time to Consider if Gold May Be Right for Your Portfolio

Now that you know many of the factors that affect gold prices, it’s time to determine if gold is right for your investment portfolio. Many people choose to look at precious metals if they’re seeking alternative investment vehicles to traditional equities, properties, and other asset classes.

If you want to add gold to your current portfolio, our Oxford Gold Group website is the perfect resource. We sell gold, silver, and other precious metals directly to clients throughout the country. If you’re searching for precious metals and other related investments, be sure to explore the various options listed on our website.