EDUCATION CENTRE

30 December 2021

Understanding Gold Price Movements

Recent political events have seen an upsurge in gold prices and brought trading in the precious metal sharply into focus. Before jumping into the gold market, it makes good sense to have a broad understanding of the factors that influence the price of gold, so that you can make intelligent informed decisions about buying and selling the commodity.

People have been buying and selling gold since the dawn of civilization and today gold trading is still a key component of investment and trading strategies. Gold is seen as a safe investment that will always retain some real value. The precious metal remains rare and gold production in the world, while steady, is not likely to change the relative scarcity of the metal in the foreseeable future.

The scarcity of gold and its commercial value make it a secure investment in real terms although its value can rise and fall in line with a range of economic, political and social factors. These factors include:

● Uncertain economic and political times can cause investors to seek security by investing in gold. Recent political events like Brexit and the US - China trade war are perfect examples of events that cause investors to seek the security of investing in gold. These market responses occur regularly when the geopolitical times become uncertain - Russia’s decision to move into the Ukraine sparked upward pressure for the gold price. For this reason, gold is often called a crisis commodity.
● Interest rates also can affect the gold price. Low interest rates generally see the gold price rise, while when interest rates rise investors tend to move their funds out of gold and into higher yielding deposits.
● Central Bank’s hold gold reserves as part of their portfolio -when economies are humming along, they tend to sell off some of their gold reserves (as gold does not produce an income dividend) - this tends to have a negative impact on the price of gold. When economies are sluggish, Central Banks often begin to build their gold reserves, which causes upward pressure on the gold prices. In recent times, many central banks have been purchasing gold.
● Economic data particularly US economic data can influence the gold price. Reports that indicate an economic downturn may be looming or that intervention by the Federal Reserve is likely can cause investors to buy or sell gold depending upon what the data indicates may happen.
● The price of the US dollar. When the US dollar falls, the price of other currencies and commodities is likely to rise and vice versa.
● Supply and demand. Gold is not consumed, although some is used industrially, most of it that was in existence 5000 years ago is still around today. However, much of it is held onto rather than traded making the supply of it rather limited.
● Central bank intervention through quantitative easing - quantitative easing tends to cause the gold price to rise.

There are many competing factors that can affect the price of gold and while the current price rises can make it tempting to jump into the market, it is best to gain an understanding of the fundamentals that affect the price before doing so.

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