Currencies all over the globe use this metal as their
standard of value. The currency value stated usually in US dollars is the price
of gold. This price can easily fluctuate as market conditions change. In the
current market environment, there are plenty of factors that contribute to gold price
movements.
Global Crisis
Prices of gold tend to increase when people lack confidence
in financial markets and governments. Since gold is considered a safe haven in
economic crisis, this is also the time when gold equates more interest from
investors. This is one of the reasons why it is called ‘crisis commodity’. History
validates this too. When the Russians moved into Ukraine the price of gold
skyrocketed because people became unsure of the geopolitical stability in the
region. In many cases military action increases the reassurance in geopolitical
situations.
Interest Rates
Gold may not be paying out an interest rate like having
bonds and savings accounts do. But gold prices are a result of a shift in
interest rates. For instance when interest rates rise, people are tempted to
sell gold investments in order to put that money where they can accumulate this
high interest rate, this is where gold prices lower. The opposite happens when
interest rates decrease.
Supply and Demand
Many analysts say that not enough gold is in the market that
should satisfy the demand for it. The above ground stock of this metal grows at
a rate of 1.75% every year; the demand
expands at a much higher rate than that. With less of something in the
market, a higher demand pressures the rise in price.
Reserves of the Reserves
Central banks like the United States Federal Reserve hold
gold and paper currency in reserve. In fact, the US, along with many
European nations, buys gold for these reserves. When the government buys gold
at a higher rate than what they are selling it at, the price of gold shoots up.
The supply of currency increases along with any available gold becoming scarcer.
US Dollar
The most dominant reserve currency of the world is the US
dollar. It is the one currency that different countries hold on to for
international trades. The strength of the dollar and the price of gold have an
inverse relationship.
The Commercial Gold Industry
Do not forget that gold is more than just a hedge fund and a
safe investment option for people. It is used in industries like jewelry
making. More than half of the gold demand is that of jewelry from United
States, India, and China. These are the top countries demanding the metal. In
China and India gold is a symbol of opulence. Other than jewelry the extra 12
percent of gold is generated from industrial applications. Manufacturers like
to use gold in all kinds of electronic devices from GPS systems to medical
gadgets.
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