When the price of gold rises, people often wonder why. Is it a bubble? What drives the cost of this yellow metal up and down? Gold is an asset that is traded with great frequency as a hedge against inflation or financial instability. In times of uncertainty, demand for gold soars due to its role as a store of value and a haven asset. However, the supply and demand dynamics of gold are rather complex. Different factors affect the economy, production, and price of gold in any given year. Read on to understand what affects the price of gold and how you can invest in it wisely.
Demand for Gold
The demand side analysis of gold prices is the most important part of the equation. The factors that affect demand for gold are cultural, financial, and economical. Gold has been the preferred store of value across the globe. Recently, it has been used as collateral for loans and as an investment vehicle. The demand side of gold is closely related to the global economy and financial markets.
The use of gold in jewelry, electronics, and healthcare industries has remained relatively constant over the years. The demand for gold has increased due to the investments made by individuals and institutions. Gold ETFs, futures, and other vehicles that allow investors to trade gold have grown in popularity. The central banks’ interest rate policies affect the demand for gold. If the banks increase interest rates, the demand for gold is likely to fall as the asset becomes less attractive.
Supply of Gold
The supply-side analysis of gold prices has several components. The factors that affect the supply of gold are mine production and the recycling of gold. The majority of gold is mined from the ground. It is an expensive process, so gold should be higher than the price at which it is sold. The supply of gold is also affected by how much gold is recycled. By recycling gold, people can earn money from the same metal that has been in circulation for years. The supply of gold from mines and recycling are dependent on several factors, including the price of gold, the cost of production, and the use of technologies for extraction.
Central Bank Purchasing
Central banks purchase gold as part of their reserves. This demand for gold is another factor that affects the price of gold. In 2018, the demand for gold increased considerably. The demand came from China, Russia, and Turkey, increasing the gold in their reserves. This demand continued in 2019.
The reason is that the major central banks are diversifying their assets. Many of them are concerned about the safety of the U.S. dollar, so they are buying gold to diversify their assets. The gold price is expected to rise in the coming years due to this change in central bank policy. It is important to note that central banks purchase gold to hedge against a financial disaster. The economic slowdown and the trade war are some factors causing central banks to purchase gold.
Inflation plays a huge role.
Inflation and gold prices are tied together. When inflation is low, the demand for gold is low. When inflation is high, the demand for gold is high. When there is high inflation risk, the gold demand goes up. This is because the price of gold increases in times of high inflation. The demand for gold is tied to the fear of high inflation. Investors buy gold from Crown Gold Exchange to protect their wealth from inflation. The demand for gold is tied to the expectations of the investors.
Gold is a precious metal used for centuries for jewelry, electronics, and other purposes. It is also used as an investment vehicle. Gold prices rise in times of financial uncertainty and are often used as a hedge against inflation. When interest rates rise, the real interest rate rises, and gold prices rise.