What Factors Are Moving Gold Prices?
The price of gold is driven by a combination of supply, demand and behavior of the market / investor. Actually it is simple to understand the movement of gold but if the factors that affect gold simultaneously sometimes contrary to intuition. For example, many investors think that gold is used to hedge inflation. Paper money will lose value if more printed. And the supply of gold is limited and relatively fixed because the supply of gold mining does not increase much from year to year.
Correlated to Inflation?
Two world economists study the price of gold in relation to many factors. Apparently, gold does not correlate well with inflation. When there is inflation does not necessarily gold can be the best investment instrument.
What are the factors of concern or fear of inflation affecting gold? Since the economic crisis, investors flocked to collect gold. But when the great recession hit the global economy, gold prices rose. But in fact gold has gone up since 2008 near the level of $ 1,000 per ounce then fell back to the level of $ 800 which then followed the rebound and continue to rise as stock prices fall. Gold prices continue to rise despite the economy recovering from recession. The price of gold peaked at $ 1,921 per ounce in 2011 and fell back since then. Currently traded in the range of $ 1,280 an ounce.
In one study, gold had a positive price elasticity. Basically it can be interpreted that the more people buy gold will push the price up along with the demand. It also means that there is no fundamental fundamentals for gold prices.
If investors start to roll around in gold, prices will rise regardless of the direction of monetary policy. But it also can not be interpreted as random behavior or the result of group behavior. There is something ‘power’ that affects the supply of gold in the wider market and gold is included in global commodity markets, such as oil and coffee.
Well, you can understand the behavior of gold fluctuations are sometimes difficult to predict. Even the movement is different from the inflation theory and the prevailing monetary policy.
Unlike oil and coffee, gold is not for consumption. Almost all the gold that has been mined still exist, not exhausted. There are some industries that use gold but not like jewelry or investment that makes its demand increase. The use of gold is more on jewelry, investment instruments and only slightly for the technology industry.
So one would expect, the price of gold could fall at any time even though gold is still circulating there-situ only. Although in countries like India and China gold serve as a store of value, people who buy there are not for trading. Jewelry demand tends to rise and fall with the price of gold. When the price of gold rises then the relative demand will fall as well.
The biggest market driver is the central bank. When large foreign exchange reserves and the economy are brightening, the central bank actually wants to reduce the gold reserves they have. That’s because gold is a dead asset. Not rewarded, unlike bonds or money in deposit accounts.
The problem for the central bank is that it arises when other investors are not interested in gold as well. So the central bank is always on the wrong side when trading. Although selling gold is what the central bank should do. Then the price of gold fell.
The central bank when it wants to manage its gold sales is like a cartel group’s style, not wanting to disrupt the market. Under the Washington Agreement, the central bank will not sell gold to more than 400 metric tons in a year. But this rule is not binding. Central banks also do not want to release too much gold into the market at a time because it will have a negative effect on their portfolio.
With the exception of China. China’s central bank has become a gold buyer and may push gold prices up. The falling gold price will be hampered by its fallout just as China’s central bank buys gold.
This article will add to your understanding of what factors drive gold, especially the inflationary link, the influence of gold supply and central bank policy.