Four Main Factors that Determine Gold Prices
Aside from being melted and used as jewelries, gold can also be used as fiat money or fiat currency, where fiat money is a legal tender whose value is assisted by the government that issued it. Legal tender on the other hand, is a form of any official payment perceived by the law that can be used and accountable to extinguish both public and private debt. Gold is considered by the market as a precious metal, along with silver and other metals that have high values . However, what really drives gold prices? In this article, we are going to tackle the different factors that affects the value of gold.
1) Monetary Policy
The value of gold is highly influenced by monetary policy which is controlled by the Federal Reserve in the United States, in this case, interest rates offers a big influence on the value of gold due to a factor known as opportunity cost, which is the idea of giving up a near-guaranteed gain in one investment for the potential of a greater gain in another.
2) Economic Data
U.S Economic data is also treated as a key essential in affecting gold prices, as economic data such as wage data, jobs reports and even GDP growth happens to influence the decisions given by the Fed. However, there are some cases where a stronger U.S. economy still has the tendency to drag gold prices lower, as robust economic growth suggests that the Federal Reserve could initiate a move to tighten monetary policy.
3) Currency Movements
Since the value of gold is dominated by the U.S. currency, the movement of currencies particularly the U.S. dollar affects the prices of gold. However, this does not mean that a robust dollar also means a higher gold price value; in fact, a strong dollar pushes gold prices down since gold and the greenback have an inverse relationship. A weaker dollar has the strength to push the value of gold higher, as a falling dollar tends to give other currencies and commodities around the world a higher value.
4) Supply and Demand
Of course, prices of gold is also influenced by its supply and demand. Experts are claiming that an increased in demand of gold with low supply could push the gold’s value higher, while a glut in gold supply with low demand could drag its value lower. In accordance to this, records from the World Gold Council indicated that gold demand during the first six months of 2016 grew by approximately 15% to 2,335 tons, along with investment demand of over 16% since 2009.