In this article, I discuss the most common factors that produce an impact on fluctuating gold prices. Unlike some other asset classes, gold prices are very sensitive to fundamental developments.
The factor that probably has the greatest impact on gold prices is the Federal Reserve’s monetary policy. Interest rates largely affect gold prices due to the so-called opportunity cost. The opportunity cost refers to giving up an almost guaranteed gain in one investment for a potentially greater return in another investment.
Since interest rates are close to their all-time lows, bonds and CDs are sometimes generating nominal gains that are lower than the national inflation rate. This results in nominal returns but also in actual money losses. In such instances, gold attracts investors’ attention in spite of its 0% yield because the opportunity cost of renouncing interest-based assets is low.
Regular meetings held by the FOMC can also impact gold prices. For example, if the FOMC discusses to hike interest rates, this usually results in depreciating gold prices.
Economic data reports including jobs, wage data, GDP, manufacturing data and so on also impact gold prices. Stronger economic data reports like low unemployment rates, GDP growth and so on may lead to FED’s decision to constrict monetary policy, sending the gold prices lower. On the other hand, weak economic data is likely to boost gold prices.
Supply and Demand
Supply and demand can also affect physical gold prices. Just like it applies to any other goods or services, higher demand and lower supply tend to lift prices while low demand and high supply are likely to cause prices to fall.
Inflation, which involves an increase in prices of goods and services impact gold prices as well. In general, high inflation has a tendency to send gold prices higher, while lower inflation is likely to result in dropping gold prices.
This is because inflation is a reliable indicator of economic growth. For instance, if the economy of the U.S. is expanding, the FED tends to increase the money supply. Doing so reduces the value of all monetary notes in service, sending the prices of the so-called safe-haven assets higher.
Currency Price Changes
Movements in currencies, like the U.S. dollar, also have the ability to move gold prices. For example, a depreciating USD tends to send gold prices higher as other currencies and commodities in the world appreciate in value when the USD drops. Conversely, a rising USD pushes the gold prices lower because those two have an inverse relationship.
Exchange-Traded Fund (ETF)
ETFs have the lowest impact on gold prices. The most popular gold ETF, the SPDR Gold Shares ETF, buys and sells physical gold based on demand. Therefore, as the demand from investors for the bullion changes, the trading activity of ETFs can also slightly move gold prices.
The last factor on the list that can affect gold prices is uncertainty. While uncertainty is a broad factor, political uncertainty is the one that affects gold prices the most. For example, uncertainty in the Brexit situation or who will become the next United States president usually help lift gold prices.
In conclusion, the fundamental and psychological factors that have the ability to impact gold prices are mainly unknown or disregarded. However, seven factors mentioned in this article including monetary policy, economic data, supply and demand, inflation, currency price changes, ETFs and global uncertainty are the most common elements that have an influence on physical gold prices.
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