The major factors that move gold prices are demand, supply, and investor behaviour. All these aspects have to work together to move the prices of gold. According to researchers and economists, inflation has nothing to do with the gold rates. In fact, when inflation in an economy takes a leap, gold isn’t necessarily the best metal to invest in. So the question is, “if not inflation, what exactly drives the price of gold?”
When the economic crisis happened, a majority of investors considered gold the best bet. During the period of the great recession, the prices of gold saw a major rise. However, the rates of this magnificent metal were already rising until 2008. The gold rates kept on rising even when the economy started to recover from the crisis. Gold prices reached its highest level in 2011 when it had gone up to $1,921. Ever since 2011, we have seen a drop in its rates. According to economists, gold rates follow the regular price elasticity aspect. When the demand for this metal increases, its price goes up. This clearly suggests that we cannot associate any underlying condition to the sudden increase or fall in gold prices. The more investors purchasing gold, the higher its rates get (no matter what the monetary policy is). However, gold is a global metal. If we see it from a global point of view, there can be multiple factors affecting the prices of gold. Let’s have a look at some common factors that moved gold prices.
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- Supply
Gold has multiple uses. But the most common area where it is extensively found in jewellery making. Statistics suggest the demand for gold was around 4,071 tons in 2017 out of which only 332 tons of gold was used in the tech industries and 337 tons in investment. Around 2,135 tons of gold was used to produce the jewellery.
As there is already tons of gold in the world, its prices should decline. But that’s not what happens. Today, the jewellery industry is the leading consumer of gold. In developing countries like China and India, gold works as the store of value. People buy it and put it in their drawers. However, they never end up selling it unless they are undergoing a financial crisis. Even then, they put gold as their last resort. The demand for jewellery is likely to go up and fall (depending on the current gold rates). When gold prices are high, its demand falls, and vice versa.
- Central Banks
Another gold price mover in the market is the central bank. When foreign exchange reserves increase, the central bank reduces the volume of gold it has. The main reason is that gold is a dead asset, which means it has no value or ROI for central banks.
Now the problem here is central banks want to trade gold at a time when investors are not willing to invest in this metal. But as gold seem the only accurate option during the crisis times, the central bank uses it regardless of its demand in the market. That’s the reason why prices of gold see a major drop.
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- Portfolio Considerations
Gold may have little to no relation with inflation. However, it is still considered an important metal that diversifies the investment portfolio. The prices of the gold hit $2,000 in 1980 (which is, so far, the maximum rate). The investors who had purchased gold at that time would lose money. This is because gold’s rates have never gone beyond that. On the contrary, people who purchased this metal in 1983 and 2005 would enjoy profits. Besides, the rule of portfolio management is totally applicable here. For instance, if an investor wants 3% of the investment portfolio in gold, he must sell it when the price hikes and purchase the same when the price falls.
The best way to know the factors driving the prices of gold is to look into the performances of different economies. How well the economy is doing, what is the supply and demand status of gold in these countries, are investors interested in buying gold and diversifying their portfolio. There are a lot of factors that can move gold prices. However, the factors listed above are the common ones.
