Three economic variables that affect gold prices
The precious yellow metal is dollar-denominated. This means that when the price of the dollar moves, gold prices also shift. Both currencies are inversely correlated so when the dollar is down, the prices of gold go up and vice versa. According to historical data, the relationship between USD and gold are about 90% negative.
Gold prices get affected by littlest of things. This makes gold a good indicator of what’s going on in the global market.
Demand VS. Supply
Like any other commodity, the demand and supply of gold plays a huge role in determining its prices. Due to the limitations of gold, the supply is very much stable so demand plays a bigger part to its prices. You might be wondering why despite its limited resources, its current prices are on a steady decline. The reason for this is because of demand. Investment-grade bullion isn’t going up in prices now because it isn’t getting enough demand from investors. Today, gold prices are down because the dollar is very strong (inversely correlated) and investors are anticipating an interest rate hike in the U.S. next year. Gold doesn’t yield interest rates so people would rather invest in securities like bonds that produce high interest rates than commodities.
In recent years, central banks are buying more gold than they are selling. Gold bought by central banks in 2012 rose by 17% from 2011 at 534.6 tons. This was the highest level of gold buying by central banks since 1964, according to the World Gold Council. On the other hand, The Bundesbank – Germany’s central bank and quite possibly the world’s biggest support of the precious yellow metal – declared that it won’t be selling its gold until 2020. In 2003, Germany refused to sell any of its gold even if its prices were very low so it’s not surprising for investors to hear of such announcement. When investors see that central banks around the world are buying and keeping more gold, they deduct this as an act of preparation for a big inflationary threat.
When gold prices suddenly increase, there’s a huge chance that there’s something going on that can negatively affect the major currencies around the world. Gold is looked at as a secure way to keep assets in place when the future of a currency seems uncertain. During an invasion, the invaded country’s currency becomes worthless. But if people in that country have physical gold assets, they will have something to fall back on. This is the reason why gold prices spiked a little at the peak of the Russian invasion in Ukraine. The spike in gold prices during that time didn’t last long, but it’s a clear indicator that events like that affect gold prices.
In the end, gold will always be linked to currencies. The precious yellow metal’s value may decrease over time, but it will always be the metal used as hedge against uncertainty. Investors who want to have a good market outlook should regularly track gold since it’s very sensitive to factors that affect the economy.