Gold is the most popular and revered precious metal in the world. The lustrous yellow metal has long been in use for over centuries and its value has only increased with every year. Thanks to the seemingly ever-rising gold rates, many individuals and investors tend to turn towards it during times of high economic inflation.
While you may know how much of an inflation-beating investment option gold is, what you may not be aware of are the factors behind the price of gold. As a matter of fact, there are plenty of factors that influence the rate of gold. However, in this article, we’re going to be looking at four of the most important ones. Let’s begin.
- Demand
The first and by far the most important factor affecting the price of gold is the demand for the metal. Since gold is just another commodity and one that’s limited in supply, the demand for it will determine its price.
For instance, as the demand for the precious metal increases, the price is also likely to increase. And it is not just individuals who purchase gold. In fact, there are many industries that use the metal during production. Since the yellow metal is resistant to corrosion and is an excellent conductor of heat, many industries use it in their manufacturing process.
Accounting for more than 27% of the total demand for gold, India is currently one of the top countries that import this precious metal. As Indians and the world continue to gravitate towards it, gold rate in India are likely to continue rising in the future.
- Macroeconomic Factors
Inflation, interest rates and exchange rates are a few of the macroeconomic factors that play a huge role in determining the course of the price of gold. Each of these three factors influences gold rates in a different manner.
For instance, the higher the rate of inflation, the higher the price of gold will be. As the price of commodities increases due to inflation, individuals tend to invest in gold due to its ability to produce high returns. This leads to a spike in the demand for it, which ultimately leads to a rise in its price.
Interest rates, on the other hand, have an inverse relationship with gold rates. As interest rates fall, the price of gold rises. Conversely, when interest rates rise, the price of the metal tends to go down.
The case is more or less the same with exchange rates as well. A strong U.S. Dollar tends to lead to lower gold prices, whereas a weak U.S. Dollar may cause a spike in the prices of the precious metal.
- The Activities of Central Banks
Every country in the world has a central bank that governs its economy, banks and other financial institutions. In the case of India, it is the Reserve Bank of India (RBI) and in the case of the United States of America, it is the U.S. Federal Reserve.
Now, the central bank of every country usually has vast reserves of gold. They use these reserves to control inflation and ensure financial stability in the economy. Any activity that a central bank takes with regard to its gold reserves can affect the price of the metal.
For instance, let’s say that the U.S. Federal Reserve decides to shore up its gold reserves by buying more of the precious metal. This would create an unprecedented rise in demand, which would in turn lead to a rise in gold rates. On the other hand, if the U.S. Federal Reserve decides to trim its reserves by selling gold, there would be a supply increase, which would lead to a fall in the price of gold.
- Geopolitical Factors
Gold usually tends to outperform during times of political uncertainties and national emergencies. This is simply due to the fact that such geopolitical factors tend to create fear in the mind of investors, leading them to invest in safe-haven assets like the yellow metal. Due to the increased demand, gold rates usually increase during times like these.
That said, war and war-like situations are probably the only times when the price of gold may fall. Investors usually have less disposable income, which they’re more inclined to use in more productive ways than by investing in gold. This drop in demand can often lead to a fall in the gold rate.
Conclusion
With this, you must now have understood the various factors that influence the price of gold. Also, keep in mind that gold prices tend to vary depending on the location. Even within a country, the price of the precious metal may vary slightly. For instance, the gold rate in Pune may not be the same as the rate in Kochi. So, this is another thing that you should keep in mind when purchasing the yellow metal.
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