Gold is an incredibly interesting asset. Not because it’s a yellow metal, that in and of itself is atually pretty boring. The interesting side of gold is how it is used and the direct correlation between how it’s used and the price of the commodity. Today, we’ll talk about the different factors that cause movement in the gold price.
Gold Is Dependent On The Law Of Supply And Demand
When we break the movement in the value of gold down to the very basic reasons, every move we see is ultimately the result of changes in supply and demand surrounding the commodity. The law of supply and demand is actually pretty basic economics.
The law dictates that when supplies are high, the value of the commodity, in this case, gold, must fall. The idea here is that by reducing prices, demand for the precious metal will be increased, leading to consumers purchasing more of the commodity and leveling out the overflow in supply. On the other hand, the law dictates that when supplies are low, prices go up. Ultimately, when gold is in short supply due to high demand, prices climb. The goal here is to reduce the amount of gold purchased and allow the supply of the commodity to level back out.
So, if you want to understand movement in the value of gold, it’s important that you get a good understanding for what causes movement in the supply and demand metrics surrounding the commodity.
Understanding Gold’s Role As A Safe Haven Investment
When economic and market conditions get tough, savvy investors don’t just throw their hands into the air and accept the losses? No, savvy investors adjust their portfolios given market conditions. In doing so, they tend to look for safe haven investments. By definition, safe haven investments are:
investments that are expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns.
The definition above matches gold to a tee! In fact, the global monetary system once ran on what was known as the Gold Standard, a system that ultimately attached the values of global currencies to the value of gold.
In general, when market conditions or economic conditions are negative, we tend to see gains in demand for gold, ultimately leading in gains in the value of the price of the commodity.
Primary Factors That Lead To Movement In The Value Of Gold
Now that you’ve got a good grasp of the basics, we can dig into the factors that actually tend to cause movement in the value of gold:
- Market Conditions – First and foremost, as mentioned above, market conditions play a key role in the movement of the price of gold. Ultimately, when investors fear that the market is in for shaky times, they tend to look at gold as a way to maintain or grow the value of their investments.
- Economic Conditions – Global economic conditions also play a key role. We tned to see movement when key reports like economic data and home sales in key regions like the United States, China, and Europe are released.
- Geopolitical Conditions – Geopolitical conditions also tend to play a role in the price of gold. When geopolitical concerns heat up, they tend to equate into economic concerns, ultimately lifting demand for gold and leading to gains in price.
- Jewelry Demand – Finally, we have jewelry demand. Gold is a prominent metal used by jewelers around the world. However, keep a close eye on demand in India, particularly around the Indian wedding season as the nation accounts for a massive chunk of demand for gold during this season.
While we may see small movements here and there from other factors, if you want a good overall picture of where the price of gold is headed based on a strong fundamental approach, pay close attention to the factors mentioned above. By following these factors, you’ll be able to make more accurate predictions with regard to the precious metal during your trading session or make more educated decisions with regard to gold as an investment!