Gold is an essential monetary asset around the world, and it is a valuable symbol of wealth with a high rated class and status. In Australia, it is one of the most favorable safe-haven investments across the nation, attracting short-term and long-term investors. It is held by the RBA as a reserve asset to help recover from the economic crisis.
Just like any other asset, gold also has its ups and downs, with fundamental and psychological factors influencing the prices. Here are the factors.
Monetary Policy
Monetary policy is a crucial factor affecting the prices globally. It is as a result of interest rates due to the opportunity cost. When bonds and CDs yield nominal returns lower than the inflation rate, it leads to money losses, making gold a more favorable investment even though it has zero yields due to the low opportunity cost of interest-based assets. The rise in interest rates boosts interest-bearing assets, leading to high opportunity costs.
Economic Data
Economic data is another driving force influencing the prices. Factors such as low unemployment, wage data, manufacturing data, and GDP influence gold prices downward. On the other side, high unemployment rates, manufacturing data, and job growth increase the prices.
Supply and Demand
In most cases, supply and demand are overlooked as a great influencer of the prices. Generally, when any goods and services experience high demand and low supply, the prices get affected. Also, the prices get influenced when there is a high supply with little or stagnant demand. So, when there is a high demand for gold and low supply, it affects the prices, leading to higher prices.
Inflation
Inflation can have a great impact on the prices due to currency devaluation. Rising inflation tends to increase gold prices, while lower inflation makes the prices go higher. When there is economic growth, the Federal Reserve increases the money supply, which dilutes the value of gold.
But gold experiences a positive impact with quantitative easing programs, which helps in expanding monetary supply, thus, influencing the prices. On the contrary, when there is no inflation, the lending rates remain low, which takes down the prices, and the rise and fall of the interest rate and inflation affect the prices.
Currency Movements
Gold prices are influenced by the U.S Dollar movement, which is a significant domination of gold. When the dollar falls, the prices go higher due to the increases in the value of other currencies and commodities around the globe. But, when the U.S Dollar gets goes high, the prices reduce because of an increase in the economy’s value.
Uncertainty
Political uncertainty has a great impact on the prices due to the changes in the stock market. When there is no clear direction in the political scene, such as presidential elections and terrorist attacks, it causes uncertainties and instability, which affects the stock market. The prices go higher due to the political effect on stock markets.
Gold Production
Gold production is also a factor that has a great influence on the prices. A high production rate can have an adverse effect by lowering the price of gold due to increased supply. Another factor is the supply in the amount of recycled gold, which is affected when gold prices rise as the economy, slows down, increasing the production of recycled gold.
Derivates Trading
Gold, like most major asset classes, can be traded on the derivatives market. This essentially means that traders can buy (or sell) based on what they believe the price will be in the future. Derivatives marketplace CME Group has shown enormous volumes of trades even during the COVID economic impacts and indeed continue to accredit gold refineries to settle gold futures contracts.
Summary
Many economies will continue to face the rise and fall in the prices due to the reasons above, which are unavoidable. Countries that depend on gold bullion as an economic booster can seek other economy-boosting channels to hold their currency stronger even when the prices fluctuate.
