Currencies all over the globe use this metal as their standard of value. The currency value stated usually in US dollars is the price of gold. This price can easily fluctuate as market conditions change. In the current market environment, there are plenty of factors that contribute to gold price movements.
Prices of gold tend to increase when people lack confidence in financial markets and governments. Since gold is considered a safe haven in economic crisis, this is also the time when gold equates more interest from investors. This is one of the reasons why it is called ‘crisis commodity’. History validates this too. When the Russians moved into Ukraine the price of gold skyrocketed because people became unsure of the geopolitical stability in the region. In many cases military action increases the reassurance in geopolitical situations.
Gold may not be paying out an interest rate like having bonds and savings accounts do. But gold prices are a result of a shift in interest rates. For instance when interest rates rise, people are tempted to sell gold investments in order to put that money where they can accumulate this high interest rate, this is where gold prices lower. The opposite happens when interest rates decrease.
Supply and Demand
Many analysts say that not enough gold is in the market that should satisfy the demand for it. The above ground stock of this metal grows at a rate of 1.75% every year; the demand expands at a much higher rate than that. With less of something in the market, a higher demand pressures the rise in price.
Reserves of the Reserves
Central banks like the United States Federal Reserve hold gold and paper currency in reserve. In fact, the US, along with many European nations, buys gold for these reserves. When the government buys gold at a higher rate than what they are selling it at, the price of gold shoots up. The supply of currency increases along with any available gold becoming scarcer.
The most dominant reserve currency of the world is the US dollar. It is the one currency that different countries hold on to for international trades. The strength of the dollar and the price of gold have an inverse relationship.
The Commercial Gold Industry
Do not forget that gold is more than just a hedge fund and a safe investment option for people. It is used in industries like jewelry making. More than half of the gold demand is that of jewelry from United States, India, and China. These are the top countries demanding the metal. In China and India gold is a symbol of opulence. Other than jewelry the extra 12 percent of gold is generated from industrial applications. Manufacturers like to use gold in all kinds of electronic devices from GPS systems to medical gadgets.