Supply, demand and investor behavior are key factors in gold prices. Gold is often used to cover inflation because, unlike paper money, its supply doesn't change much from year to year. However, the growth rate of investment in gold over the past 2000 years has not been significant, even though demand has exceeded supply. The price of gold is generally inversely related to the value of the United States dollar because the metal is denominated in dollars.
All things being equal, a stronger EU. The dollar tends to keep the price of gold lower and more controlled, while a U.S. Weaker U.S. The dollar is likely to drive up the price of gold due to increased demand (because you can buy more gold when the dollar is weaker).
Monetary policy controlled by the Federal Reserve is perhaps one of those that most influence the prices of gold in real time in the market. Interest rates have a significant influence on gold prices due to a factor known as opportunity cost. Opportunity cost occurs when profits that are guaranteed in an investment are forfeited due to the possibility of obtaining even more significant benefits from another investment. Gold production is another important factor that significantly influences gold prices.
China, Australia, Russia, the United States, Canada and Indonesia are the countries that produce most of the world's gold. While gold production has increased around the world to meet demand, gold is a limited resource. Profitable gold mining is running out fast, which will drive up gold prices in the future. In addition, because it does not corrode easily, it is used in the manufacture of various types of high-precision electronic devices and components, such as circuit boards, capacitors, and cell phones, just to name a few.
The investment niche also occupies another large part of gold production. Since there has been no alternative to gold in any of these sectors, it will continue to enjoy high industrial demand. It is common for gold prices to be negatively correlated with the value of the currency and, more specifically, with the US dollar. What this means is that when the value of the dollar is high, the price of gold remains relatively flat.
However, it will become more expensive in other countries where the value of their currency has fallen. This weakening in demand further lowers the price of gold in the US. UU. While ETFs don't exert a significant influence on gold prices, they are worth mentioning.
ETFs buy or sell physical gold in the form of ingots or coins on demand. The price of gold is affected, as ETFs buy and sell gold depending on the prevailing market. This will have a definite positive turn in the price of gold. Determining the value of gold is not as simple as setting the price of assets.
The four types of companies in the industry deal with gold. They are exploration or development, mining, consumers and recyclers. The three categories of consumers are industrialists, jewelry producers and investors. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions achieve financial freedom through our website, podcasts, books, newspaper columns, radio programs and premium investment services.
Interest rates have a major influence on gold prices due to a factor known as opportunity cost. Opportunity cost is the idea of giving up an almost guaranteed return on one investment for the potential for a higher return on another. Since interest rates remain close to their historic lows, bonds and CDs are, in some cases, producing nominal returns lower than the national inflation rate. This leads to nominal gains, but to real money losses.
In this case, gold becomes an attractive investment opportunity despite its 0% return, because the opportunity cost of giving up interest-based assets is low. The same can be said for rising interest rates, which boost yields on interest-bearing assets and increase opportunity costs. In other words, investors are more likely to give up gold as interest rates on loans rise, as they would get a higher guaranteed return. Another factor that drives gold prices is US economic data.
Economic data, such as employment reports, wage data, manufacturing data, and more broad-based data, such as GDP growth, influence the Federal Reserve's monetary policy decisions, which in turn can affect gold prices. Although not engraved in stone, a stronger US. The economy (low unemployment, employment growth, industrial expansion and GDP growth above 2%) tends to push gold prices down. Strong economic growth means that the Federal Reserve could take steps to tighten monetary policy, which would affect the opportunity cost dynamics discussed above.
On the other hand, weaker employment growth, rising unemployment, weakening industry data, and below-average GDP growth can create an accommodative Fed interest rate scenario and increase gold prices. . While they are far from being a guarantee, rising or rising levels of inflation tend to drive up gold prices, while lower levels of inflation or deflation affect gold. Inflation is almost always a sign of economic growth and expansion.
When the economy grows and expands, it is common for the Federal Reserve to expand the money supply. The expansion of the money supply dilutes the value of each existing banknote in circulation, making it more expensive to purchase assets that are a store of perceived value, such as gold. This is why quantitative easing programs that caused the money supply to expand rapidly were considered positive for physical gold prices. In recent quarters, inflation has been relatively moderate (just above 1%).
The lack of inflation has been one of the factors that has forced the Federal Reserve not to raise interest rates on loans, but it has also kept gold prices low, which usually perform better in an environment of rising inflation. This tug-of-war between interest rates and inflation can play a constant tug-of-war on gold prices. Among these seven factors, it is very likely that the stocks of publicly traded funds (ETFs) have the least influence on gold prices. ETFs aren't designed to boost the market, but they're still worth mentioning.
Finally, the large factor of uncertainty may influence gold prices. The only thing investors should keep in mind is that uncertainty is not a quantifiable statistic like many of these other points. It is a completely psychological factor that depends on the investor and may differ from one event to another. .