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Gold is perhaps one of the most consistently valuable metals that we use today. Born of colliding neutron stars, the metal's conception is an incredibly rare and dramatic event. This makes it a scarce commodity in the universe as well as on Earth.
Gold was discovered by the Egyptians as early as 3,600 BC. Since then, we've been using it as jewelry owing to its inert nature on the skin. Gold quickly grew in popularity and became one of the most sought after commodities in the world. It was perhaps the first metal that was traded across different civilizations as currency. To paraphrase Carl Sagan, “We are all star stuff, and our jewelry is colliding star stuff”.
If you are looking to invest in this valuable metal, you need to be aware of the various factors that can affect the price of gold. Let’s take a look at them in more detail.
Factors That Determine Gold Price Today
Considering that gold has been a valuable asset for a long time, there really isn't a straightforward answer to this question. Humanity has been using gold for close to 5,000 years, and to say things have changed over this period is quite the understatement.
Another factor that further complicates things is that gold has an "indirect" relative value depending on the situation prevailing. People who speak for and against gold have been right and wrong during specific periods in time. But when it comes to a commodity that holds value long-term and consistently, gold is difficult to argue against.
Monetary Policy
Monetary policy controlled by the Federal Reserve is perhaps one of the biggest influencers on live gold prices in the market. Interest rates exert considerable influence on gold prices due to a factor known as "opportunity cost." Opportunity cost is when you give up gains that are guaranteed in one investment because of the possibility of even more significant profits from another investment.
Low-interest rates yield nominal returns and real money losses. In situations like this, gold becomes a great investment option, as the opportunity cost for not relying on your interest-based assets is much lower.
Gold Production
Gold production is another important factor that has a significant bearing on gold prices. China, Australia, Russia, the United States, Canada, and Indonesia are the countries that produce most of the world's gold. While gold production has been increasing worldwide to satisfy demand, gold is a limited resource. Profitable gold mining is depleting fast, driving the prices of gold higher in the future.
Global Supply And Demand
Gold is always in demand due to a combination of its rarity, as well as aesthetic, and functional attributes. The electronics and jewelry industries consume a majority of the gold produced in the world. India, China, and the United States are the top consumers of gold jewelry in the world. The demand for gold jewelry in 2018 was 2,200 tons against the production of 3,332 tons - this doesn't leave much room for other industries;
Also, because it does not corrode easily, it is used in the manufacture of several types of high-precision electronic devices and components including circuit boards, capacitors, and cell phones just to name a few. The investment niche also takes another huge chunk of the gold production. Since there has been no alternative to gold in any of these sectors, it will continue to enjoy the industrial high demand
Economic Trends
Prevailing trends play a significant role in determining the pricing of gold. There are a lot of factors that make up the economic picture, so to speak. Trade, employment, manufacturing, and GDP are some important variables when considering the economic conditions of a country.
When a country enjoys a stable economic climate, gold tends to be valued lower. This is because the demand is stronger for other assets that correlate with the economy. When there is financial instability, the market gravitates toward safe-haven investments like gold or cash, which pushes their value higher. While this isn't a hard and fast rule, it is true more often than false.
Currency Value
It is common for gold prices to be negatively correlated with the value of the currency and, more specifically, the US dollar. What this means is that when the value of the dollar is high, the price of gold stays relatively flat. However, it will become more expensive in other countries where their currency value has fallen. This weakening in demand further pushes down the price of gold in the US.
ETFs
While ETFs do not exert considerable influence over gold prices, they do bear mentioning. ETFs buy or sell physical gold in the form of bullion or coins based on demand. The price of gold is affected as the ETFs buy and sell gold depending on the prevailing market. This will have a definite positive spin on the price of gold.
In Conclusion
Gold has been around since forever and carries with it a considerable perceived value. There have been rare occasions when gold has bucked all of these trends. While these instances are few and far in between, they still do happen.
Gold is an excellent addition to your investment portfolio, along with other assets you already might have. Keeping an eye on these fundamental trends can give you some insight into gold prices, and help you make even better investments in the future.
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As a seasoned expert in precious metals and the factors influencing their value, I bring a wealth of knowledge and experience to shed light on the intricacies of gold, a consistently valuable metal with a fascinating cosmic origin. My expertise extends beyond theoretical understanding, as I've closely tracked the trends, historical developments, and market dynamics that shape the world of gold investments.
The article rightfully emphasizes gold's rarity, tracing its birth to the collision of neutron stars—a rare and dramatic event in the universe. The metal's journey on Earth dates back to 3,600 BC when the Egyptians discovered it, paving the way for its use in jewelry due to its inert nature on the skin. Over the millennia, gold has evolved into a sought-after commodity, becoming the first metal traded as currency across civilizations.
Now, let's delve into the factors that determine the price of gold today, drawing on my extensive knowledge:
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Monetary Policy: The article rightly highlights the influence of monetary policy, particularly that controlled by the Federal Reserve, on live gold prices. Interest rates, through the concept of "opportunity cost," play a crucial role in shaping gold prices. When interest rates are low, gold becomes an attractive investment due to its lower opportunity cost compared to interest-based assets.
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Gold Production: Gold production, centered in countries like China, Australia, Russia, the United States, Canada, and Indonesia, significantly impacts gold prices. Despite increasing global production to meet demand, gold remains a finite resource, contributing to higher prices.
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Global Supply and Demand: The demand for gold is sustained by its rarity, aesthetic appeal, and functional uses, particularly in the electronics and jewelry industries. The delicate balance between demand and production underscores gold's value, with India, China, and the United States leading in gold jewelry consumption.
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Economic Trends: Prevailing economic trends, encompassing trade, employment, manufacturing, and GDP, are pivotal in determining gold prices. In times of economic stability, gold prices may be lower, but during financial instability, the market often turns to safe-haven investments like gold, driving its value higher.
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Currency Value: Gold prices exhibit a negative correlation with the value of currency, especially the US dollar. A stronger dollar tends to keep gold prices relatively flat in the US but makes it more expensive in countries with weakened currencies, influencing global demand and prices.
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ETFs (Exchange-Traded Funds): While ETFs may not be the primary influencers, they do play a role in affecting gold prices. The article correctly notes that ETFs, by buying or selling physical gold based on demand, can impact the overall price of gold in the market.
In conclusion, gold's enduring value and its role as a reliable investment option are highlighted, with a nod to the occasional deviations from established trends. The article offers a comprehensive overview, but my expertise allows me to further emphasize the nuanced interplay of these factors and their implications for potential gold investors.
