Gold has always attracted the attention of investors because of its unique and important investment properties. It is considered a safe haven during uncertain economic conditions, acts as a store of value and serves as a hedge against inflation. Gold generated a cumulative return of around 360% in the 30-year period from 1990 to 2020. Despite its attractive investment properties, gold price can also be volatile like any other commodity or financial asset. 

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If you want to invest in gold, this article will help you need to understand what drives gold prices and under what circumstances investing in gold is worthwhile.

1- Value of the U.S Dollar

Because gold is dollar-denominated, its price is inversely related to the value of the U.S dollar. The inverse relationship between the two means that if the price of the U.S dollar increases, gold prices usually fall and vice versa. When the U.S dollar gets strong, gold prices come under pressure because of the subdued demand. On the other hand, a weaker U.S dollar increases the demand for gold, which tosses prices upward.

2- Industrial Demand

Gold is used in different proportions in electronics, memory chips, computers, and has many other industrial applications. As per some estimates, more than 50% of the total gold demand was for jewelry in 2019, with India, the United States, and China being the largest gold jewelry consumers. Naturally, other things equal, if the demand for gold for industrial or ornamental use rises significantly, gold prices would rise. In contrast, other things equal, if demand declines significantly, gold prices would fall. 

3- Investment Demand

Various gold exchange-traded funds (ETFs), such as SPDR Gold Trust (GLD) and iShares Gold Trust (IAU), are among the largest gold ETFs. They hold large quantities of physical gold from their purchases of different investment instruments. As per some estimates, gold’s use for investment purposes accounts for roughly 30% of the total annual demand. Usually, when the assets under management of these ETFs rise, it prompts funds to purchase more gold that could result in increased demand for gold. In such a scenario, increase in demand can push gold prices upwards, whereas a decline in demand can pull the prices downwards. 

4- Economic Conditions

During economic uncertainty, recession, and high inflation, investors rush to buy gold to protect their savings from negative effects of inflation. As equities plummet, bond yields decrease, and real estate values plummet, the demand for gold increases as more and more investors buy gold, pushing gold prices up. In other words, gold acts as a safe haven for investors during uncertain and deteriorating economic conditions. Many investors allocate some portion of their investment to gold irrespective of the economic conditions to diversify and stabilize their portfolios. 

5- Gold Production

China, Russia, South Africa, Peru, the United States, and Australia are among the big gold producers in the world. Apart from the demand side of the equation, gold prices also move in response to supply-side gyrations. Theoretically, higher gold production can lower gold prices whereas low gold production can increase gold prices. 

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With the bulk of gold already mined, it is becoming difficult and costly to mine additional gold. The rising cost of mining new gold is another factor that can contribute to rise in gold prices. 

6- Central Bank Reserves

Although paper currency is no longer backed by gold, central banks all over the world hold some reserves of gold along with foreign exchange reserves. Central banks of the United States, Germany, and Italy are among the largest holders of gold reserves. The International Monetary Fund also holds one of the largest reserves of gold. A significant increase in gold demand by central banks can increase gold prices if other things remain equal. Some central banks often increase their gold reserves and start buying gold bullion, which can temporarily increase demand for gold and push the prices up. 

Conclusion

Despite numerous advantages of investing in gold, its price can be volatile as different factors influence it. To invest in gold profitably, you need to know the factors that move its price. The value of the U.S dollar, industrial demand, investment demand, economic conditions, gold production, and central bank reserves are some of the major factors that mostly move gold prices. In this article, we looked at these factors in isolation, but in the real-market scenario, multiple factors influence gold prices simultaneously. So, you need to analyze different factors to find out what is actually moving gold prices. 

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