Why the Price of Gold Tends to Rise and Fall
Have you ever gone to your favourite jeweller and found that the price of the gold watch or necklace you intended to buy has skyrocketed, and when you went back the next time, the price had gone below the previous initial cost? This fluctuation in prices is driven by the overall value of gold, which is affected by several driving factors. These include:
Value of currencies
The metal, gold, is dollar-denominated. For this reason, the value of the US dollar also affects its pricing. The value of the currency can be volatile and change over a period. When the value of this dollar rises relative to the currencies of other countries worldwide, gold will be more expensive in these other currencies.
Consequently, the price of gold will lower in terms of the US dollar since it is inversely proportional to the latter. In simpler terms, as the US dollar’s value falls, gold rises because it gets cheaper in all other currencies.
The movement of the price of other commodities such as oil
According to finance and market researchers such as market realists, on average, gold and crude oil tend to have a direct relationship. This translates to movement in the same direction, meaning a rise in gold price is followed by a rise in crude oil prices and vice versa. However, this can fail to happen in some situations where there are different stronger driving factors.
Nevertheless, both of them have a significant economic impact on fiscal performance and a country’s financial sector.
Supply and demand of the metal
Other than making jewellery, gold has a variety of applications such as in technology to make electronics, e.g., GPS units, and in industries as well for specific machines. The more these products are in demand, the more the amount of gold is required for supply. As explained in the theory of supply and demand, this increase in demand will equate to a rise in the gold price.
Gold production costs
Just like for any other product, the cost of its production and subsequently its availability plays a significant role in determining its price. Accessing gold is complex and requires a lot of funds, making it costly, resulting in increased gold prices and by-products in the long run.
If and when production is increased, and the cost is lower, the market price will also fall, although there has not been a significant change in the levels of gold production worldwide: apart from the fact that it is getting harder to mine and requires a lot of environmental impact assessments and mitigation measures to deal with issues such its hazard to the humans mining and the effects it has on the environment.
Note, the largest part of gold supply comes from mine production, and the remaining amount of gold is recycled, processed, and refined to produce quality gold for use.
Investor behaviour and investment demand
Problems such as an economic stoppage can cause panic and havoc. Investors tend to stop or reduce their investments in risky assets and move towards ‘safe havens’; in this case, gold. This is because gold is considered to be a great cushion and fort against inflation. Subsequently, due to an increase in demand, the price of gold will also increase.
If a situation that is the opposite of the former occurs, the costs will then fall. Gold plays an important role in an investment assortment and is considered a great tool to generally alleviate loss in trading and financial decision-making.
Gold has been a metal of high financial, emotional, and cultural value since time immemorial and continues to hold the same position over the years and hopefully in the future. It is a great driver of the economy.
If you would love to invest and trade in gold or know when to get the lavish old products at a pocket-friendly price, carefully study and understand the factors listed above that determine its worth. In addition, keep diving into sites and conversations with experts in finance and gold trading such as myself to help you make wiser decisions and understand trends in the gold market movement better.