Top Factors That Affect Gold Prices

Gold is one of the most valuable metals worldwide, with a total gold mining market value of $214.1 billion. Nearly 27 million ounces of gold is traded daily. It acts as an asset that protects traders against inflation and helps them diversify their portfolios. Since it is obtained through mining, its supply and demand highly fluctuate, affecting its prices in the commodities and CFDs market. 

In our article, we will discuss the top factors affecting the price of gold. 

Why is the gold market preferred by seasoned traders? 

Gold, as an investment, is one of the best hedges against inflation. The prices of gold are stable in the long-term and witness an uptrend irrespective of economic uncertainties. Gold prices have more than doubled in the last decade, proving to be one of the best investment assets to exist. The 2019 pandemic saw a fluctuating pattern in gold prices, but it is back on a favorable track and is seeing a gain in prices once again.

Factors affecting gold price 

Inflation

Inflation refers to the increase in the price of goods and services in an economy. Higher inflation affects gold prices by driving the prices higher, whereas lower inflation pushes the gold prices down. 

Inflation is directly proportional to the price of gold because people prefer holding onto gold during rising prices as they expect the gold value to generate wealth in the future and act as a safe haven asset. This increases the demand for gold, driving up its prices and making the asset act as a hedging tool against inflation. 

Taxes and imports 

Gold is mined in almost all the continents except Antarctica, but there are certain countries that are high exporters of gold, whereas others are importers of the same. The import and taxes affect the gold prices directly. Countries like Switzerland, the UK, the US, and Australia export gold to gold importing countries like India and China.

Hence, the price of gold in the exporting nations is always on an uptrend trajectory and stable, whereas the purchasing price is lower. On the other hand, importing countries witness a more expensive price for gold since taxes and importing costs are added to the metal’s cost. 

Demand and supply

Trading gold as an investment asset has a fluctuating price based on its demand and supply. The higher the demand for gold, the higher its prices and vice versa. The demand for gold can increase in several situations, like central banks procuring more gold, a fall in interest rates, a fall in the returns of other assets like forex, equities and bonds, currency appreciation, inflation and more. 

On the other hand, when there is less demand for gold and more supply (as an exception) due to situations like recession, increase in interest rates or other assets performing better – the price of gold falls. 

US Dollar

The US dollar value and gold prices are inversely proportional to each other as the yellow metal is dollar-denominated. This means that gold in the global market is issued in the USD currency. When there is an increase in the value of the USD, gold prices decrease, and when the USD falls, gold prices increase. 

This is also the case because USD is the most highly traded currency in the forex market, and when it does not provide strong returns, people shift their investments to gold CFDs. But when the USD performs well, demand for gold decreases (and price falls) as investors/traders shift to trade USD. 

Central bank reserves

Central banks of all countries hold gold as reserves along with their paper currency. When the central bank accumulates more gold into its reserves, the global demand for gold increases, and so does its price. On the other hand, when the central bank sells off its gold reserves and holds less of it, the demand for gold decreases, and its price falls.

Central banks stockpile the number of their gold reserves to fight uncertain economic situations and inflation. This assures them that they will be able to maintain the money supply in the country. When an actual economic crunch occurs, and the central banks do not have enough money supply, they tend to sell the reserves and exchange them for domestic currency to support the inflow of cash into the economy. 

Wealth protection 

Wealth protection refers to the amount traders have invested today to remain stable or increase in the near future. Since gold has an enduring value and protects one against inflation, traders invest more in it during recession to protect their wealth. In a recessionary phase, the value of bonds, equities, real estate and every other security falls but gold prices are not as drastically hit. This increases the investor’s interest in gold as an asset and increases its price. 

Even in political instability and currency devaluation, gold protects investors’ wealth. On the other hand, when the economy is stable, not facing turbulence, and financial markets are performing well, investor wealth is already protected. Hence, demand for gold is not dramatically increased, lowering its prices. 

Jewellery market size

The jewellery market in every country is different in size and affects gold prices directly. This means the stronger the jewellery market in a country with higher demand, the higher the gold prices and vice versa. 

Countries like China, India, the UAE and Indonesia have big gold markets that witness an increase in demand during festive and wedding seasons, increasing gold prices. On the other hand, countries where gold is not used as much in daily routine or during festivities/weddings have a comparatively smaller jewellery market with less fluctuating gold prices.

Start trading gold via CFDs today

Gold is one of the most popular commodities. It can be traded directly in the commodities market or via CFDs through Blueberry’s forex trading platform. If you want to buy your first gold CFD today, you can sign up with us and enjoy narrow spreads and low costs of the transaction.