GOLD
The price of gold on any given day depends on a variety of factors. Whether you’re looking to find out the current gold price or you’re examining a gold rate chart to discover past and future price trends, understanding the factors that affect the market value of gold will give you important insight into gold prices and how they change.
Key Factors Affecting Gold Prices
As with other precious metals, the value of gold products changes throughout the course of each day if you keep a close eye, there can be plenty to see. Some examples of gold products include gold coins, gold bars, and gold bullion. The prices of these products fluctuate as they react to economic, political, and other events both domestically and internationally.
As we’ll address in a bit more detail below, some of the major factors affecting gold prices include:
Buyers and sellers
Central banks
Interest rates
Relationship Between Buyers and Sellers
The relationship between the number of sellers and amount of buyers affects the price of gold. In the United States, dollar-denominated commodities often rise in value as the dollar goes down, in turn requiring more dollars to buy this commodity.
The Influence of Central Banks
Central banks are national banks. These banks play a variety of roles in their countries. One main function these banks play within their countries is that they can help stimulate their respective country’s economy by affecting the amount of money supply. Central banks:
Implement monetary policies
Issue currency for their country
Provide banking and other financial services for the government and commercial banking system
Central banks also manage the reserves in their country, such as foreign-exchange reserves. Foreign-exchange reserves consist of:
Foreign bank deposits
Foreign banknotes
Foreign treasury bills
Gold reserves
International Monetary Fund reserve positions
Short and long-term foreign government securities
Special drawing rights
Central banks include:
The Federal Reserve (United States)
European Central Bank, or ECB
Deutsche Bundesbank (Germany)
Bank of England
Bank of Japan
People’s Bank of China
How Interest Rates Move Gold Prices
Interest rates represent what it costs to borrow money. The lower an interest rate is, the cheaper it will be to borrow money in a given country’s currency. Interest rates can impact economic growth and function as a key tool for central bankers as they make decisions around monetary policy.
In order to stimulate the economy, a central bank can decide to lower interest rates. This action allows more people to borrow money, which in turn is expected to increase consumption and investment.
Low interest rates will weaken that nation’s currency as well as push down bond yields. Both factors positively impact gold prices.
The Value of Gold and Why the Gold Market Moves
Gold is one of the top commodity markets, behind only crude oil. However, price action for gold does not follow traditional supply and demand as other commodity markets do. Inventory levels and the expected demand typically determine the price of a commodity, and prices will rise when inventories are low but demand is high.
On the contrary, currency fluctuations and interest rates impact prices of gold more. Gold is inversely correlated to the U.S. dollar and bond yields highly. Thus, when the U.S. dollar dips with interest rates in parallel gold tends to rally. Gold is also very scarce, and this fact gives gold its value.
Investors value gold for different reasons. These reasons include:
The scarcity of gold
The ability of gold to be traded
Gold’s potential as a safe haven investment
As a result, many investors look to gold when they want to make an investment in precious metals.
Spot Gold
The latest spot gold price is the price of gold for immediate delivery. Spot gold market trading occurs nearly 24 hours a day, as orders for gold transactions take place worldwide. Most activity takes place in specific cities around the world, focusing primarily on:
Hong Kong
London
New York
Sydney
Tokyo
Zurich
Bullion coin transactions are almost always priced using the spot price.
Futures Market
As with other commodity futures, the gold futures market is a market in which contracts agreeing to sell or buy gold at a set price on a specific future date are entered into. As a legally binding agreement, a precious metals futures contract determines the price for the delivery of the metal at a future date. While the price is variable, a futures exchange standardizes the following:
Quality
Quantity
Place of delivery
Time of delivery
Differences Between Spot Gold Price and Futures Price
You will typically see a difference between gold spot price dollars and the dollar amount of the futures price. Normal markets have the futures price higher than the spot price. The following factors determine the price difference:
Number of days to delivery contract date
Prevailing interest rates
Strength of market demands for immediate physical delivery
When expressed as an annual percentage rate, the difference between spot and future prices is known as ‘forward rate.’
Trends Affecting Gold Prices Over the Last Ten Years
Following market convention, gold prices are based on prices of future contracts that will mature first. Trends that affect the price of gold include:
Market Uncertainty
It can be difficult to predict the next major rally of the price of gold in the U.S. or anywhere in the world, as sentiment plays a large role in gold prices. Gold prices rise during periods of high uncertainty. Additionally, a shifting inflationary environment and periods of currency debasement tend to make gold do well. For example, gold prices are reaching all-time highs during the COVID-19 pandemic. [1]
The Dollar
Gold is denominated in U.S. dollars. Thus, fluctuation of the dollar can play a big role in the price of gold. If the dollar is weaker, gold is relatively less expensive for foreign buyers, and prices of gold rise. When the dollar is stronger, gold is more expensive for foreign buyers, lowering the price of gold.
Gold Price Trends from 2010 to 2020
Gold prices peaked in August 2011 and then fell until the middle of September 2018, tracking at a mean level from 2016 until the end of that period. Since September 2018, gold prices have again risen. There is a general upward trend that can partly explain the increase since the start of 2020; this trend in 2020 should not be solely attributed to the global COVID-19 pandemic. [2]
Various factors and trends affect gold prices. Knowledge of these factors and trends can influence investment decisions, and so it is in an investor’s best interest to understand how they can interact and affect each other even if just on a high level.
1. The Wall Street Journal. Why Gold Prices Are Hitting All-Time Highs, https://www.wsj.com/articles/why-gold-prices-are-hitting-all-time-highs-11596533550. Accessed August 8, 2020.
2. The Conversation. Why gold prices go up and down – five charts, https://theconversation.com/why-gold-prices-go-up-and-down-five-charts-138918. Accessed August 9, 2020.
