What Drives the Price of Gold?

Gold is a fancy to have for any person due to its high value in the global market. People worldwide use gold jewelry and buy gold as it's considered a status symbol in society. Some people believe it is a source of long-term investment, as gold has always seen a hike since the beginning of 2005. 

We all understand the value of gold in our lives, but do we know the standard terms that affect its prices in the market? 

Correlation to Inflation

After conducting a thorough study on gold price's relation with several factors, Economists found out that gold doesn't correlate that well to inflation. Gold doesn't need to turn out to be a good bet for us with the rise in inflation. 

Most of the time, whenever the world economy sees an economic crisis, investors start to hoard gold. As inflation starts rising, the value of currency starts to drop in the market. It makes people turn their money into gold by purchasing it to save it from the effects of inflation.

If inflation lasts for too long, people use gold as their escape, and they start to invest in it more.

Supply Factors

We understand that gold is not consumable, unlike other items such as petroleum or food, and also, it is true that gold that has already been mined is still around us in this world, and yet we are mining more and more gold every day. So it should be expected if the price of gold starts to fall with time as a significant amount of gold is being mined every day. But it still doesn't lose its value. The question that arises here is why it doesn't happen?

The answer comes with the way gold is being used in the world. People like to buy gold in the form of jewelry. And after purchase, all of that gold jewelry ends up in a drawer. Countries like India and China are big marketplaces for gold buyers. So, steady demand for gold jewelry is a normal thing in these countries. 

Central Banks

Central banks always act as the biggest movers of gold prices. In such situations, when a nation's Foreign Exchange reserves are large, their central bank tries to reduce the amount of gold in its locker because they consider gold as a dead asset that generates no returns.

It leads those central banks to sell the excessive gold they hold at lower prices in the market. As a result, the cost of gold falls.

ETFs

Many exchange-traded funds (ETFs) around the globe have come up as significant gold buyers and sellers. These funds trade on the exchanges like stocks, and then they measure their purchases in the form of gold in ounces. Although these funds merely reflect the current price of gold rather than affecting it.

Portfolio Considerations

As we talk about portfolios, we need to understand as investors what could be the principle behind buying gold. Gold doesn't go that well against inflation. However, as we compare it with a larger portfolio, we find gold to be a huge diversifier for investments. We need to consider these portfolios and try to understand their impact.

As we talk about real terms, gold prices were at the top back in 1980. But afterward, people faced loss only with their investments in gold. Only those people were happy with their investments who bought gold in 1983 or 2005. It's important to note that rules of portfolio management also apply to gold.

Gold's price fluctuates based on a person's holdings on it. For example, if someone wishes to have 2% of the portfolio in gold, then it should be essential for them to sell it as the price rises and buy more of it as prices fall.

Retaining Value

It's the most entertaining fact about gold that it always retains its value even after centuries pass. Erb and Harvey compared the salaries of soldiers from 2,000 years back and soldiers from the current time. Their research showed that there was merely 0.08% of annual investment growth even after 2,000 years.

The conclusion these researchers made out of this research was that the purchasing power of gold has always stayed constant and is unrelated to the current gold price.

Common Factors That Influence Gold Prices

There are many common factors that affect gold prices. Let’s discuss them one by one:

Consumption demand

As we talk about a country like India, we find out how the demand for gold is interwoven with cultures, traditions, and people's desires to make them look prettier with gold jewels. When it comes to consumers' views, people see gold as both an investment and an adornment for them. When asked, most consumers say that they buy gold as an investment, and half of them consider it embellishment.

Protection against volatility

Most people around the world consider gold as an escape from the volatility and uncertainty of the market. Being a physical asset, people feel gold to be a haven for their investments. People understand that even if other assets lose their value, gold will still sustain its value. With their attraction to gold as an asset, investors will always prefer to invest in gold whether the world economy sees a rise or fall.

Gold and inflation

People always tend to save their currency in the form of gold whenever the economy faces inflation. If inflation stays for too long in the economy, people use gold as their safe escape against inflation. This factor increases the demand for gold, leading to a rise in the price of gold in the market.

Gold and interest rates

Some industry experts believe that there is a relationship between gold and interest rates under normal circumstances. With a rising yield, there are expectations of the growth of the strong economy as well. But a strong economy always leads to the rise of inflation, which makes people hoard gold to save them from inflation. Also, investors tend to flock to regular income investments as the rates rise. Such investment yields a fixed return for investors, unlike gold which has no stable returns for investors. This situation drops the demand for gold, and the price goes flat with it. 

Good monsoon

In countries like India, gold's demand is gravely affected by its rural demand, which primarily depends upon a good monsoon. India consumes 850-850 tons of gold in a year, and rural India alone accounts for a 60% share of the country's total gold consumption. That's how the monsoon plays a massive role in the country's gold consumption, as rural India depends on income from crops. If the monsoon is good, farmers will earn more from their crops and invest their earnings in gold. On the other hand, if there won't be a good monsoon, farmers will sell the gold they were holding to gain funds.

Impact of the rupee-dollar equation

Indian gold rates are affected mainly by the impact of rupee-dollar equations. However, it doesn't affect global gold rates at all. India imports a larger amount of gold to fulfill the country's demand needs. If the rupee shows a weak value against the dollar, then gold prices will rise as well.

Geopolitical factors

Geopolitical factors usually leave a positive impact on gold. If we look at the current crisis, such as Korea's rising nuclear capability, it has helped boost the prospects of gold. Whereas crisis leaves a negative impact on most assets, they work out to be positive in gold's aspect as people always consider it a haven for safe investments.

Weakening dollar

Gold and dollar generally share an inverse relationship. As the dollar dominates over gold in the global market, if a dollar gets weaker and starts dropping its value, the prices of gold start to push up and vice versa. The connection between the dollar and the gold is considered inverse because if a dollar starts to fall its value, it increases the value of other currencies. This leads to the increase in demand for commodities in other countries, including gold's increased demand. When gold loses its value, investors start to invest in gold more to save their money in the form of gold.

Future gold demand

As per estimates, the gold supply is still 1,000 tons lesser than its actual demand. As we still don't have enough mining capacity, most of the need is fulfilled using recycling methods. Therefore, less supply of gold is highly affecting gold prices in the global market. Inflation in the global economy is always driving gold prices positively in the market as well.

What makes the price of gold is so high right now?

As the safest haven for our investments, our world sees gold as their sole escape to avoid any uncertainty or volatility in the financial market.  Here are a few reasons that describe why gold is always on a tear:

It's a safe haven

During times of uncertainty or crisis, it is always seen that the demand for gold will eventually rise. Especially in those cases when the equity market tumbles. During the corona pandemic, the price of bullion was at its highest in the last seven years. The uncertainty of the financial demand led people to invest in gold more for securing their investments.

Sense of stability

The precious yellow metal known as gold has always been considered to be a stable investment from old times. Gold doesn't get affected by outside factors, and it doesn't lose its value due to uncertainty in the financial market.

Weakened dollar

As the dollar's value depreciates, outer investors get attracted to it more. Also, gold gets cheaper in other currencies. So it increases the demand for gold on a global level as the dollar gets down in the market.

Low yields

Since March, as we can see, Federal Reserve is keeping interest rates next to zero to keep the financial market stability and keep interest costs as low as possible to stabilize the economy. Also, it has bought billions of dollars in bonds. Doing so brought yields down, which made gold and its lack of yield more charming for investors.

Media coverage

As gold prices see a hike, gold starts to gain more attention from analysts and investors, and it also starts getting more financial media coverage. This exposure brings more investor's interest to the gold. Eventually, with growing demand, analysts expect the price of gold to get even higher than it already is.

Is now the time to buy gold?

Extremist investors believe that the right time to buy gold is when its price has fallen, so we can buy gold at its lowest price. We can simply stock up gold by purchasing it at a low price and wait for the gold market to gain more value in our favor. But it can’t be the best strategy as per current market situations. Gold is not in favor of investors since the last august as its price peaked at $2,084 due to pandemic uncertainty.

Investors were hoarding gold using it as a traditional safe haven for investments, which increased its demand in the market with increasing its price eventually. 

In normal times we generally consider two reasons that help gold to rise further. First, gold is considered as a habitual hedge against inflation which has returned with retaliation. Second, gold price always rises with the fall of the stock market. Although this time, gold did the strangest thing by losing its value along with the fall of equity investments. It shows that gold has failed to fulfill its traditional role of protecting investors against inflation and the fall of stock markets. The demand for this precious yellow metal is most likely to slow down after last year’s record inflows. We can consider that gold is being out of fashion at these times, but still, it could be a great opportunity for you if you are looking for long-term investments and diversifying your investments to a low-risk source during these uncertain times.

Different Ways of buying and selling gold

There are many ways of owning gold – paper or physical. You can buy them physically in the form of a bar or coin, and for paper gold, you can use ETFs, etc. Here’re five ways to invest in gold to get maximum profits

Gold bullion

One more satisfying way to own gold is to purchase gold in the shape of bars or coins. You’ll have the end level of satisfaction when looking at it and touching it, but ownership has serious disadvantages, too, if you own more than just a little bit. One of the enormous disadvantages is probably the requirement to safeguard the physical gold and to assure it. To get maximum profits, owners of physical gold are entirely dependent on the rising prices of commodities, in contrast to the owners of a business, where the company could produce more gold and therefore more profits, driving their higher investment. 

You can purchase gold bullion in several ways: through online merchants such as APMEX or JM Bullion, or even local merchants or representatives. A victim shop may also sell gold. Note that gold’s spot price as you’re buying, so that you can make a fair deal. You might require transferring in bars rather than coins because you’ll likely pay the price for a coin for a coin’s collector value rather than its gold content. 

Gold future

Gold futures are the best way to wonder on the price of gold rising (or falling), and you could even receive physical delivery of gold if wanted, though that’s not what motivates speculators. The main benefit of using futures to invest in gold is the enormous influence you can use. In other words, you could lots of gold futures for a comparatively small amount of money; if gold futures act in the direction you think, you could create much money very promptly. 

ETFs that own gold

If you don’t require owning physical gold, a great alternative is to purchase an ETF that tracks the goods. Three of the biggest ETFs include SPDR gold shares (GLD), iShares Gold Trust (IAU), and Aberdeen Standard physical gold shares ETF (SGOL). ETFs aim to match the performance of gold minus the yearly investment ratio. The investment ratios on the stocks above are only 0.4 percent, 0.25 percent, and 0.17 percent, individually, as of July 2021. 

Mining stocks

Another way to take benefit of rising gold prices is to own the miners who produce the essence. In some manner, this may be the best option for the investors. Second, the miner can raise production over time, giving a double whammy consequence. So you get two methods to win, and that’s safer and better than relying on the increasing price of gold alone to buoy your investment. 

ETFs that own mining stocks  

Don’t require digging much separately on gold companies? Then buying an ETF can make much sense. Gold miner ETFs will give you publicity to the biggest gold miners in the business. Since these funds are diversified across the sector, you won’t be harm much from the underperformance of any single miner. The largest funds in this sector include VanEck Vectors Gold Miners RTF (GDX), Vaneck Vectors Junior Gold Miners ETF (GDXJ), and iShares MSCI Global Miners ETF (RING). The investment ratio on those funds is 0.51 percent, 0.52 percent, and 0.39 percent, individually, as of July 2021. These finances offer the benefit of owning individual miners with the safety of variegation.  

Final words

Investing in gold is not for everyone; lots of investors stick with placing their money on cash-flowing firms rather than have to rely on someone else to spend more for the shiny metal. It’s one individual reason legendary investors such as Warren Buffett are against investing money in gold and instead advocate buying cash-flow businesses. Plus, it’s very convenient to invest money on stock or funds, and they’re incredibly liquid, so you can quickly change your position to cash if you require to.