Like most commodities supply and demand is incredibly important, but gold also retains additional value. Government vaults and central banks comprise one important source of demand for the metal. Investment demand, especially from large ETFs, is another factor underlying the price of gold.
Gold sometimes moves opposite to the U. Supplies of gold are primarily driven by mining production, which has leveled off since Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
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Monetary Reserve Definition A monetary reserve is a store of cash, treasuries, and precious metals held by a central bank. Forex Market Definition The forex market is where banks, funds, and individuals can buy or sell currencies for hedging and speculation. Read how to get started in the forex market. It may be an oft-overlooked point, but simple supply and-demand economics can influence physical gold prices as well.
As with any good or service, increased demand with constrained or low supply has a tendency to pull prices of that good or service higher. Conversely, an oversupply of a good or service with stagnant or weak demand can push prices lower.
Growing demand and constrained supply has been a reason gold prices have headed higher this year. A fourth factor that can impact gold prices is inflation, or the rising price of goods and services. While far from a guarantee, rising or higher levels of inflation tends to push gold prices higher, whereas lower levels of inflation or deflation weigh on gold. Inflation is almost always a sign of economic growth and expansion. When the economy is growing and expanding, it's common for the Federal Reserve to expand the money supply.
Expanding the money supply dilutes the value of each existing monetary note in circulation, making it more expensive to buy assets that are a perceived store of value, such as gold. This is why quantitative easing programs that saw the monetary supply expand rapidly were viewed as such as positive for physical gold prices. A lack of inflation has been one factor that's coerced the Fed not to raise lending rates, but it's also held down gold prices which typically perform better in a rising inflation environment.
This push-pull between interest rates and inflation can play a constant tug-of-war on gold prices. The movement of currencies — very specifically the U. A falling U. On the contrary, a strengthening U. It also pushes down gold prices since gold and the U. A weaker U. Among these seven factors, the actions of electronic-traded funds, or ETFs, are more than likely the smallest influencer of gold prices. You may opt-out by clicking here. Edit Story. Breaking Jun 23, , am EDT.
Interestingly , this is not the case when investors start adding other commodities, such as cotton, copper and live cattle. This highlights the distinct characteristics of gold and other commodities, to the extent that there is arguably no such thing as a commodity asset class — as I have emphasised, among other commodity investment pitfalls, here.
Instead, gold and crude oil seem to perform distinctly from the rest. Forecasting asset prices has never been easy, however, and investors always need to be cautious. To the extent that there is more uncertainty to come about the prospects for economic growth, including from COVID, and if low interest rates prevail, gold prices may well continue to rise.
The more negative news on economic growth, the greater the increase in the price of gold. Even then, the direction of travel may not be straightforward. If bad news causes stock markets to fall again, investors may well sell off gold and other commodities to finance their losses in other assets. This will put a downward pressure on gold prices. Equally, the situation may well change if the current uncertainty is resolved.
The decline in gold prices, following a bullish period, is a good example to keep in mind. If you liked this article, find more expertise in our gold series :.
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