How is the Price of Gold Determined?
There's never a bad time to invest in gold—and there's a reason that investors have trusted in gold for centuries to grow and protect their wealth. Since gold is isolated from stocks and bonds and is inversely correlated with the dollar, one might wonder exactly what impacts the price of gold.
Factors that Impact the Price of Gold
The Value of the Dollar
As the central banks create more money, their currency begins to lose value, while the value of gold rises over the long term. What’s more, gold is seen as a hedge against inflation—so when inflation hits and the value of the dollar drops, the price of gold goes up.
Demand
Gold prices can also be affected by the supply and demand theory; as demand for consumer goods such as jewelry and electronics increases, the cost of gold can rise. Additionally, gold sees demand from exchange-traded funds that hold gold and issue shares that investors can buy and sell. What’s more, there’s been an increase in demand due to central banks buying gold,
Supply
Gold mining is an expensive undertaking, so primary gold production is starting to slow down. The world’s production of gold affects its price (yet another example of supply and demand). Recycling precious metals can help to supplement the demand, but if there’s more demand than supply, the price of gold will rise.
The Economy
Since gold is a great way to safeguard your wealth, when the economy takes a turn for the worse, more investors invest in gold to protect their assets. Stock market crashes and economic crises can cause the price of gold to rise rapidly.
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