What factors influence the gold price?

What factors influence the gold price? © Own image

What affects the price of gold

With the sharp rise in the gold price in the summer of 2019, gold as an investment moved back into the focus of the public. Not only more gold fans were interested in the precious metal, but also for "normal" investors the development of the gold price suddenly seemed highly interesting again.

The global gold price is based on the gold price of the London Bullion Market Association (LBMA). This benchmark determines the value in U.S. dollars at which an ounce of gold is traded. Computers calculate the gold price on the basis of real transactions and update the gold spot every second. In 2015, the system replaced the traditional gold fixing system, in which representatives of the five LBMA bullion banks set the price for 1 ounce of gold twice a day.

These factors have an influence on the gold price

The interplay of supply and demand, both physical and in the 200-fold abundance of derivatives (= "paper gold"), influences the price and can cause it to fluctuate sharply even within a short period of time. The gold price is then called "volatile". In this article we try to list the most important factors that influence the general gold price. A clear separation is often not so easy.

Stock Markets & World Economy

In principle, gold is considered a safe haven in times of crisis. Values can be hedged with gold and thus saved through crises. If a recession occurs, or if there are increasing signs of a general economic downturn on the stock markets, investors like to take refuge in precious metals. The profits made on risky equity investments are then invested in gold. The increased demand for gold, silver and other investment metals then drives up prices, leading to a rising gold price.

Wall Street sentiment affects gold prices (Image: Unsplash)

However, as long as there is the possibility of quick profits and high returns on the stock markets, investors prefer to invest their money in shares, bonds and other financial products. The gold price then declines or stagnates.

The decisive factor here is, of course, the situation on the leading markets in the USA, the EU and Asia.

Monetary Policy, Interest Rates & Inflation

Closely interwoven with the development of the global economy, the monetary policy of leading countries and their central banks also plays a decisive role for the gold price.

Above all, the U.S. Federal Reserve and the European Central Bank are trying to influence the economic situation with their key interest rates.

The FED sets the key US interest rate (Image: CC BY-SA 3.0)

Depending on whether key interest rates then rise or fall, the price of gold will also react. Since gold does not generate any interest income, other forms of investment may be more worthwhile when interest rates are rising. When interest rates are low or falling, on the other hand, gold may seem more attractive, thus leading to more demand and a rising price.

Generally, governments and central banks force a slight inflation (the inflation target of the ECB & FED is 2 percent). By increasing the money supply, a currency then loses purchasing power.

30 to 40 years ago, the price of gold was around USD 350 per troy ounce; today, the price (at the beginning of November 2019) is around USD 1,500. This shows that the purchasing power of gold remains stable, while paper currencies are losing more and more of their purchasing power. Increased inflation has positive effects on the gold price because investors appreciate the value-securing function of gold.

US Dollar

Gold traded in US dollar / troy ounce

As noted above, the LBMA gold price, although maintained in London, is traded in U.S. dollars. Therefore, the current exchange rate of the dollar, as well as its relation to the euro, also influences the development of the gold price. As a rule of thumb, which can also be applied the other way around, the following therefore applies:

A strong dollar has negative consequences for the gold price development; if the dollar is weak, the gold price rises. It is the same with the euro: If the euro is weak, gold becomes more expensive in the euro area.

That is why we have also seen new all-time highs in the euro area - the one in dollars is still unbroken.

The reason for this is that European and Asian buyers take advantage of the exchange rate and invest in gold especially when the dollar is weak. In addition to the dollar, other currencies, such as the euro or the yen, and their exchange rate relationship to the dollar therefore naturally also play a role.

Geopolitics & Crises

Geopolitical events are also said to play a major role in the development of the gold price. Recently, for example, the tensions between the U.S. and Iran were discussed as a driver of the gold price.

As a rule, however, geopolitical conflicts have only an indirect influence on the gold price, as such crises tend to have an impact on the equity and bond markets, which are then in turn reflected in the gold price. The oil price also often played a role here in the past - especially with regard to conflicts in the Middle East. Trade policy conflicts, such as the current trade war between Donald Trump and China and Europe, probably have a much more significant impact.

As a rule of thumb, it can be said that as soon as economic or peace policy uncertainties arise, the price of gold inevitably rises.

Supply & Demand

All of the above factors influence the price by stimulating supply and demand in a certain direction. In addition to these external economic and political aspects, there are of course also "internal" market mechanisms that have an impact on pricing.

On the one hand, there is the demand from the industry. As before, the largest buyer / consumer of physical gold is the jewelry industry. It is responsible for slightly more than half of the demand for gold.

On the other hand, the behavior of large investors & central banks can also be decisive. Central banks and private banks have to deposit a certain percentage of their monetary value in gold. Especially in turbulent times on the financial market, banks as well as countries buy large amounts of gold. Russia and China have been leading the way for years, converting US dollar reserves into gold.

Purchases or sales by large investors - primarily gold funds, issuers of gold certificates or exchange-traded commodities (ETCs) - also influence the price.

Gold mine
How much new gold is being mined? (Image: Unsplash)

On the supply side, of course, how much "new" gold is mined also plays a role.

Gold mine operators can influence the price of gold by limiting supply and mining or selling less gold.

However, there is also a reciprocal relationship between the amount mined and the price of gold. Since there are fewer and fewer gold deposits in the earth and they are becoming more and more difficult and thus more expensive to extract, the mining of some deposits is only worthwhile once a certain gold price is reached.

Gold recycling, on the other hand, strengthens the gold price in positive times. When the gold price is high, more gold is usually turned over by consumers and businesses. Gold recovered from recycling usually accounts for between one-third to one-half.

Is manipulation of the gold price taking place?

Yes, it has been mathematically and empirically proven that the price of gold has been manipulated since 1993. First physically by the bullion banks, which borrowed gold from the central banks. Later only - and above all much more efficiently - in paper gold form, the so-called "derivatives". Above all, market participants who have large quantities of gold - mostly in the form of gold bars or in securitized form - can consciously influence the development of the gold price: For example, central banks or mining companies have the possibility to provoke short sales or increase production by lending gold in order to let the gold price fall. If, on the other hand, the gold price is to move upward, central banks buy more gold, while mining operators limit their production.

In addition, a gold price manipulation can be caused via the currencies: If the ratio between Euro / USD is manipulated in favor of the dollar, this also has a negative impact on the gold price (See above). Despite these manipulation possibilities, however, gold is still one of the safest investment opportunities currently available.

Buy Gold - Is it worth investing in the precious metal?

There is much to suggest that the gold price will continue to rise. For one thing, hardly any large gold deposits are still being discovered. The rare precious metal is only available in very limited quantities on our planet. At the same time, gold consumption in the production of electronic goods such as cell phones, but also the investment gold demand is constantly increasing.

Those who want to invest in gold are hedging against the progressive decline in the purchasing power of paper currencies. Paper money can be printed at will, as the American central bank FED or also the ECB continuously do, in order to "stimulate the economy". In reality, however, this increase in the money supply means a devaluation of existing assets. That means, by devaluation of money (=inflation/purchasing power loss) the debts become less, but also the savings.

Money has its value only through the trust of the people who pay with it in the system, states and banks. Its value is based only on a promise, but it is actually a promissory bill. But it also behaves like a promissory bill when the debtor is broke - it is worthless.

If this trust decays, each value approaches its intrinsic value, i.e. the real value held by the respective object.

Money is made of paper and accordingly worth no more than the paper it is printed on, real estate is coming off real estate bubbles, stocks are either approaching paper value or approaching the real value of the respective company, and - gold remains gold - an ounce has roughly the purchasing power of a good gentleman's outfit. It has always been like that, and will always remain like that, no matter what bankers or politicians say.

You can find more tips under "Investing money properly in gold". If you have any questions about precious metals (gold, silver, platinum and palladium), please feel free to contact us at any time or drop by one of our branches in the 9th, 3rd or 22nd district. We are looking forward to meeting you!

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