What Factors Affect The Value Of Gold?
Historically, gold has been hailed as a unique store of value that experiences a rise in its prices over time. Serving as a hedge against inflation and the declining dollar, the yellow metal is known to create opportunities for investors in economically challenging times.
However, amid the current pandemic, we’ve been witnessing frequent fluctuations in the yellow metal’s value.
New investors are now worried about the return on their precious investment. But after carefully assessing the historical trends in gold prices, economic experts are still hopeful about the precious metal’s future. Here’s a brief look at the factors that affect gold prices:
Central bank reserves
It’s a widely known fact that central banks hold physical gold and paper currency in reserve. However, when they start diversifying their reserves and invest more in gold rather than paper currency, the price of gold typically surges. Top buyers of physical gold include countries like Russia, Turkey and Kazakhstan.
US dollar’s value
Gold is US dollar-denominated; this means that when the dollar strengthens, people can’t afford to buy the yellow metal in bulk, leading to a decrease in its value.
However, when the US dollar declines, the demand for physical gold increases, leading to a sudden surge in its value. As a result, gold is deemed as a hedge against inflation since rising rates mean a fall in dollar’s value which, in turn, means an increase in gold prices.
During economically challenging times, investors flock to buy gold due to its ability to act as a ‘safe haven.’ When other forms of investment such as bonds, real estate and equities fail to provide expected or actual returns, gold can be the last resort for many investors. Hence when you see the economy crashing, you’ll witness gold prices suddenly rising owing to the increase in the precious metal’s demand.
It’s said that all the gold that’s available in the world right now can fit on a soccer field only two to three feet above the ground. The precious metal is rare which makes it more desirable and influences its rate.
Over the last ten years, major gold mining countries like China, Australia, the US, Peru and South Africa have been unable to unearth significant gold reserves. The reasons for this include challenging working conditions and environmental impacts.
Since getting small amounts of gold costs a lot of money, the yellow metal only sees a rise in its value.
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