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When there is a surge in gold prices, experts are often caught off guard and redouble their efforts to understand what factor or factors cause prices to rise. Former Federal Reserve Chairman, Ben Bernanke told Congress that, "Nobody really understands gold prices, and I don't pretend to really understand them either." Even so, savvy investors are turning to gold at almost any price as it provides long-term security and a hedge against inflation. If you are planning to invest in the precious metals market, current prices and price trends are important to keep track of. It's important that you learn about prices and understand the different investment choices available before you proceed.
Factors That Determine the Price of Gold
The global gold price today is determined by a number of factors. Although it is difficult to predict what the spot price of gold will be, it is important to understand some of the many ways spot prices are influenced.
Availability and Price
Experts are in agreement that approximately 120,000 to 150,000 tons of gold have been mined and is above ground. They also agree that most of this gold still exists in one form or another. Although an additional 3,200 tons of the valuable metal are mined each year according to the World Gold Council, an impressive amount of existing gold still must be recycled annually simply to help meet global demand. This is a key factor in determining its price. Most of the metal is used in the retail industry, specifically in making jewelry and also for industrial and/or dental purposes. Another factor influencing the price of gold is the balance of new and recycled gold production which is consumed by investment products, which include bullion coins or gold Exchange Traded Funds - with Central Banks being a significant purchaser of the actual metal itself.
All of this is vital to understand because the constant ebb and flow of supply vs. demand is a key driver for the price of gold. We discuss other key factors affecting prices below.
Value of the US Dollar
The facts are that the value of the US dollar governs the price of gold. Since gold is priced around the world in US dollars, a stronger US dollar will ensure that the price of gold stays low, whereas a weaker US dollar has historically resulted in the price of gold increasing almost immediately.
Gold Reserves and Central Banks
The Central Banks of countries around the world not only oversee monetary policies and their own currency, they also control money supplies, set interest rates and manage inflation to the best of their ability. Whether successful or not, many western countries have tied their currency to gold. Today, Central Banks of many countries, especially the United States, continue to hold large gold reserves. (The US has the largest such reserves at more than 8,000 tons.) Because of this, the IMF and central banks play a major role in determining the price of gold. Whenever a Central Bank sells off some of its gold reserves, a downward trend in gold prices typically follows. Conversely, when a Central Bank of a country adds to its gold reserves, this results in the price of gold increasing.
Today, many western countries continue to view the policy of holding gold as an effective hedge against the US dollar. In fact, the World Gold Council states that Central Banks have recently begun to buy more gold than they are selling, thus driving up its price. One reason for this buying trend could be that holding physical gold in reserve is seen as strengthening a country's currency because it has a tangible asset tied to that currency. These are just some of the reasons experts cite when discussing the fact that China and Russia have recently been significant buyers of gold. These are also reasons why the price of gold continues an upward trend.
Gold has proved to be an effective hedge against inflation at almost any price. Market studies have revealed that inflation is one of the leading indicators to predict the price of gold. In fact, over the past several decades as the US dollar has weakened overall, the buying power of gold - and thus its price - has remained strong.
Central Banks around the world use a strategy called quantitative easing in which they buy large quantities of securities in order to increase their money supply. This pushes interest rates down, which - in time - increases the price of gold. If quantitative easing is overdone by a country's Central Bank, this can cause inflation, which in turn causes the price of gold to rise even more.
A sometimes-overlooked factor that can influence the price of gold is whether or not Interest rates are high or low. That's because the popular metal is acknowledged by investors around the world as being a reliable hedge against low-interest rates at any price.
Industrial and Commercial Purposes
Another factor affecting the price of gold is that approximately two thirds of the world's annual production of gold is used in jewelry. As one of the largest consumer markets for gold jewelry, India and China alone have an effect on its price. When the demand for jewelry increases and the supply is limited, the price of gold automatically rises. As soon as the demand for gold decreases, its price also depreciates. Another factor determining its price is that gold has excellent thermal and electrical conductive properties which result in it being used for numerous industrial purposes. Additionally, because of its resistance to corrosion and bacterial colonization, gold is prized in the medical field. In other words, the more uses there are for gold, the higher its price will rise.
The most common way that people invest in gold is by acquiring physical gold which is available in the form of gold coins and gold bars. Lear Capital can help you find out more about current market gold prices, the best time for you to buy and sell gold, and answer any other questions you may have about the price of any particular precious metal.
Gold Price Per Ounce
Our live charts are based on gold prices per ounce.
The statements made on this website are opinions and past performance is no indication of future performance or returns. Precious metals, like all investments, carry risk. Precious metals and coins may appreciate, depreciate, or stay the same depending on a variety of factors. Lear Capital, Inc. cannot guarantee, and makes no representation, that any metals purchased will appreciate at all or appreciate sufficiently to make customers a profit. The decision to purchase or sell precious metals, and which precious metals to purchase or sell, are the customer’s decision alone, and purchases and sales should be made subject to the customer’s own research, prudence and judgment.