The price of gold has changed many times throughout economic history. What does the price of gold depend on and how does it evolve?
Why does the price of gold fluctuate?
First of all, let's consider what the price of gold depends on. In short, the price of gold depends on five factors:
- Demand for gold comes from people buying gold jewelry and from companies using the metal in industry.
- The amount of gold that central banks hold as reserves (foreign exchange).
- The level of interest rates.
- Financial market interest in gold as a defense against inflation and currency devaluation.
This year, in the face of the global crisis related to the coronavirus pandemic, we have seen a sharp increase in the price of gold. To be more precise, the price of gold per gram in 2020 has increased by 28.6%: from $1528 at the beginning of January to $1952 on July 30. Why is this happening? There are several reasons.
The first and most obvious is that global panic in the face of a coronavirus pandemic has led to a noticeable increase in demand for gold as investors flee from risky investment assets to safe ones. Second, because of the massive infusion of money by global central banks to maintain liquidity (i.e., bailouts) in financial markets, the likelihood of future inflation has increased. A direct defense against potential inflation is investment in gold. The most obvious player here is the Federal Reserve System (FRS), which is essentially the central bank of the United States. It is the most important financial player in the financial world. The Fed puts money into the U.S. financial market by buying securities in that market (most often U.S. government bonds - called Treasury Bonds). Buying supports demand and prices for U.S. securities, thus protecting the market from falling.
Many economists and investors worry that the Fed is de facto "printing" money to save the financial market. In any case, the Fed's intervention in supporting the financial market increases the money supply in the United States, which at some point will translate into higher inflation in the US. Today's rise in the price of gold already reflects this expectation - and a rescue from future inflationary increases.
The final reason is the fall in interest rates in the financial markets. There's a rule of thumb in the financial world: since gold as an asset doesn't pay dividends and interest to an investor, then investor interest in gold falls when interest rates on bonds and other instruments rise. This means that if an investor can make money by investing in securities, he will sell gold and buy such instruments. This logic also works in the opposite direction: when interest rates fall, gold becomes more sought after in a relative sense.
The short-term dynamics of gold price per gram now depends on several important fundamental factors. The further valuation of the yellow precious metal will be influenced by the economy, inflation, interest rates and the US dollar exchange rate. Long-term investors do not pay attention to short-term price fluctuations. Gold price per gram go down and up. It is far more important to determine your yield based on the long-term price appreciation of the yellow precious metal. It will be needed to fund retirement or will be used for other essential needs.
The price of gold is negatively affected by the increase in interest rates by the Central Bank. Firstly, in this case, classical assets bring a higher yield to investors, while precious metals, as we know, do not bring interest income. Secondly, high US Federal Reserve rates strengthen the dollar, which means that the gold price is under pressure, as they are inversely correlated.
How much does gold cost?
Gold investments have never lost their appeal - that's a fact. However, they become particularly attractive during periods of economic instability. Compared to other types of investments, investing in precious metals seems to be the most reliable way of investing capital. Despite the familiarity with this approach, the price of gold in the dynamics of recent years makes one wonder how far the belief in the growth of gold prices is justified in the current conditions. Traditionally, gold price per gram have been pegged to the London fixing. Looking at a chart with gold prices, one can easily see the market trend regarding the rise or fall in the price of this precious metal.
Experts note that it is currently very difficult to say anything concrete about the threshold of gold prices, but there is reason to believe that the situation is temporary. The instability of the gold invariably leads to fluctuations in the exchange rate. The overall geopolitical situation and the state of the economy raises the expectation that gold will rise in value in 2016. At the same time, bankers believe that the price will continue to fall until the end of this year, which Goldman Sachs analysts also agree with, predicting a drop to USD 1050 per ounce. In general, it can be said that the price of gold in US currency has remained at the level of last year. Check the price of gold at mennica-krakowska.