Posted on May 25, 2010 by Manish — 2 Comments ↓
This is the first post in the learner’s series. A simple question that we will answer through this post is, “Why do gold prices fluctuate?”. While I am writing this article, the Gold price stands at $1238 per ounce (1 ounce = 28.35 grams). This fluctuate everyday, and the gold prices have gone significantly up in the past few months. Like all other investments and commodities, gold prices also fluctuate everyday and are driven by the supply and demand. Some of the important factors affecting gold prices are listed below: 1. High inflation: When the economy exhibits high inflation, people prefer to invest in commodities, especially Gold. This demand is driven by the fact that in the times of high inflation, stock markets don’t do well and Gold becomes a safer option. 2. US Dollar: When the US dollar declines, the demand for gold increases. Most investors think that gold is a good hedge against declining dollar. 3. Low interest rates: If the real interest rates are low, then the returns on bonds, equities and real estate will not adequately compensate for the risk and inflation. Therefore, people will prefer to invest in gold. Apart from these factors, the gold prices are also affected by human sentiment, the fear of the currency becoming worthless because of a national crisis, demand of jewelery, etc. http://financetrain.com/learners-series-why-gold-prices-fluctuate/
What Are the Main Factors Affecting Gold Price?
July 9, 2012
The price of gold increased very rapidly in the last few years. Many bullion traders bet that gold will continue to rise in the years to follow and thus maintain their long position. In light of the recent developments in the precious metals markets let’s examine what are the main factors that are affecting the prices of gold. Further what could induce gold prices to resume their upward trend of the past few years? I think if we were to ask each bullion trader, he or she will have a different list of factors he or she considers affecting gold price. So of course there are many factors to consider and no one list will be complete or agreed by all traders. Therefore this list is based on my own impressions and opinions and should be taken with a grain of salt. Further, keep in mind that the markets aren’t constant; the perspective and circumstances fluctuate so there could be a situation in which a certain factor used to affect gold price in a certain way and now the relation is different. E.g. during the collapse of 2008 and even more recently during the downgrade of U.S rating back in August 2011, the prices of gold rose and the yields of U.S long term bonds declined. This was because many traders were becoming more risk averse and thus put their money in U.S LT bonds and gold. This sentiment seems to have shifted during 2012. As the market becomes more risk averse and LT yields decline, the price of gold doesn’t go up, as if the relation between rise aversion and gold reversed or perhaps just broke off. Perhaps the high gold price made gold less of an investment for risk aversion traders than it once was. Now that we got that out of the way, let’s see the main factors that are affecting the price of gold. The list isn’t in a particular order: 1. Major Currencies: Euro/USD, Canadian dollar, Australian dollar. I have shown in the past that there is a strong relation between the so called risk currencies and gold; as Euro, Aussie dollar and Canadian dollar tend to appreciate against the USD, gold price tends to rise and vice versa. The chart below shows the linear correlation between Euro/USD and gold price during 2012.
2. The FOMC monetary decisions; the monetary expansion QE1 and QE2 might have been among the key factors in pulling the price of gold up. Many wanted to keep the value of their dollar and invested in gold. People thought the value of the dollar will crash due to these stimulus plans but that...