Viewed
as a symbol of wealth, gold has maintained its value over the years while a
number of other currencies have come and gone. Inspired by this consistency,
many investors are already choosing gold for their investment portfolios. So,
if you are interested in buying gold as an investment, understanding how gold
prices are determined will be an advantage.
Many
factors influence the price of gold. Keeping an eye on the four factors discussed
below ensures that you will be
up-to-date on the latest gold bullion price and can
thus better decide when to buy or sell.
1. Gold Reserves
The World
Gold Council reports that in recent times, central banks have begun buying more
gold than they are selling. This reserve asset management strategy is aimed at diversifying
the bank’s monetary reserves. As a result of central banks accumulating more gold reserves, the price of gold also
increases.
Many countries
have reserves that are composed primarily of gold. This includes the United
States, France, Germany, Italy, Portugal, and other European countries. Apparently,
gold reserves play an advantageous role for wealth funds of governments to
achieve their respective investment mandates even amidst uncertain political
situations.
2. Industry Demand
Like
every other commodity, gold prices are influenced by the laws of supply and
demand. According to reports from the World Gold Council and The London Bullion
Market Association, jewelers' demand for gold amounts to over 50% of the
overall demands for the precious metal. The volume has seen significant
increase over the years too.
In
addition to the consumption of gold for jewelry purposes, a growing demand
for this precious metal has been observed among the technology sector and other
manufacturing industries. Particularly, manufacturers of medical and electronic
devices have increased their demand for gold. As the demand for these consumer
goods requiring gold in their manufacturing increase, it is therefore expected
that the costs of gold will also increase.
3. Supply and Production
Highlighting
how the world's gold production affects the price of gold, we take a look at
the major players in gold mining. As gold mine production declines, the supply
also decreases. And as the resources become depleted, it becomes more difficult
to access these precious metals in order to have enough supply to meet consumer
demands. This in turn will require more mining and production costs to account
for additional depth, environmental impact, and other additional hazards.
Considering all these extra costs and challenges to get less supply of gold, it
is just logical for the prices of gold to increase as well.
4. Value of Currencies
Generally,
the price of gold is inversely related to the value of the paper currencies.
This means that when the currency is strong, the price of gold is more
controlled. However, when the currency is weak, it is most likely to drive the
price of gold up. Why? This is because consumers tend to invest and trade in paper
currencies when it is strong but not when it is weak or when the economy is
uncertain. When paper currencies are weak, we prefer to make investments in the
various forms of gold, confident that their values will be less influenced by
inflation and will likely increase over time.
So, if
you want to make a well-informed investment in gold, make sure that you are up
to date with regards the world’s gold reserves, the jewelry and industry
demands for gold, the supply and production of gold, and its value in relation
to other currencies, among others.
