Jan 19, 2022 2 mins read

What’s Behind the Demand for Gold?

Gold is one of the most sought-after precious metals in the world. This demand is not only because of investment and financial value but also because of its extensive use in jewelry, medicines, and electronics. The price of gold today is $1780.93 per ounce, but the worth of gold will change with each passing minute. Hence, you should know about the gold prices before you opt for investing in gold.

Many factors influence the gold price. Some major ones include supply, demand, and investor sentiment. That sounds basic enough, but the way those things interact isn’t always straightforward. For instance, some investors consider gold to be a hedge against inflation. That makes perfect sense because paper currency drops in value as more are created, but the gold supply remains essentially stable. Gold mining, as it turns out, doesn’t add much at all to availability. So, what then is the underlying driving force behind gold prices? What influences the value and demand of gold?

In this blog, we’ll discuss three major factors that are considered as the drivers of gold.

RESERVES OF THE CENTRAL BANK

Gold and currencies are kept in reserve by the central banks. As the central banks shift their financial resources from the dollar bills that they’ve collected, and towards gold, the price of gold normally rises. According to World Gold Council, central banks now hold more than 35,000 metric tons of gold.

The central banks are in charge of their countries’ currencies, although these can fluctuate in value depending on the nature of the economy’s apparent superiority or inferiority. Because interest rates, the conventional monetary management tool, have indeed been locked at zero for over a decade, banks may be obliged to print more money in situations of need. This boost in the supply of money may be required to avoid economic upheaval, but it will come at the cost of currency depreciation. On the other hand, gold is a limited physical asset with a limited quantity that cannot be easily replenished.

VALUE OF US DOLLAR

Generally, the value of gold is considered to be inversely related to the US dollar price. The reason for this correlation is that gold is metal-denominated. A stronger currency keeps the value of gold under control, but in case of inflation, the prices of gold rise, creating a hedge against inflation. It’s always a good time for investing in gold when the prices of gold are lower.

JEWELRY AND INDUSTRY DEMAND

The prices of gold can be influenced by the demand and supply of gold jewelry and the gold used in industrial equipment and products. Shortage of gold in medical or industrial products can result in a price hike for gold. Similarly, lower demand for jewelry can assist in decreasing the price of gold.