Factors Influencing Gold Prices
External Market Factors
Gold as a Currency
Gold has for centuries been used as a medium of exchange or store of value. The fact that the majority of the world’s central banks continue to hold gold as an asset is a reflection of this history. Consequently, when global political or economic turbulence occurs and the financial markets in major countries become increasingly unstable with diminishing confidence in currencies, gold, as a former currency with inherent value, attracts attention and its price begins to rise.
For the reason, the factors that cause bullion prices to fluctuate are the host of factors that can prompt turbulence. These factors include conflicts likely to have a serious impact on the world economy, foreign exchange turmoil caused by sharp falls in the US dollar as the world’s key currency, a rise in crude oil prices prompting inflation, and stock market gyrations in major countries, especially the United States.
When these factors combine to create the state of urgency, gold prices will likely react.
Gold as a Commodity
If you view gold as a commodity, then supply and demand is the factor that determines gold prices. Gold prices rise when demand exceeds supply. In contrast, prices decline if supply exceeds demand.
To determine demand for gold, it is important to look at demand for jewelry, which represents approximately 50 percent of total demand. Demand for gold is influenced by the economic performance of developed countries, mainly the United States. Other influencing factors include political stability, climate, and business trends in India and countries of the Middle East and the Gulf, as these countries are major gold consumers. By extension, these factors also have an influence on gold prices.
Market’s Internal Factors
Examples of market internal factors include central bank behavior, something that has recently become the market’s greatest concern.
Amid a rapidly expanding monetary economy due to economic globalization and deregulation, some central banks are showing an interest in asset management. For example, they lend gold to the market to earn revenue in the form of gold interest or sell some of it for capital gains.
Price-affecting factors that arise from within the market need to be taken into consideration, reflecting a feature of today’s gold market.
Source: Nikkei Money DIGITAL, Nikkei Business Publications, Inc.
The chart showing historical gold prices indicates that significant rises in international gold prices were seen in the following five phrases. When events like this combine to create a state of urgency, gold prices are likely to increase.
- When the first oil crisis occurred from 1973 to 1974
- When the situation in the Middle East become more serious, driven by risks such as the second oil crisis from 1979 to 1980
- When Mexico’s debt crisis occurred from 1982 to 1983, followed by financial instability in Brazil
- When the US dollar rapidly depreciated in 1985
- When global financial instability was triggered by the subprime mortgage crisis that emerged in 2007
The price of gold tends to rise when the global economy experiences turmoil as a result of heightened international tensions sparked by wars, surging oil prices, inflation, declining real interest rates, and growing concern about global finances. Given these characteristics, the yellow metal is often described as “a safe haven in perilous times.”
Starting the late 1990s, gold consistently remained below the $300 level. There are several reasons for this price weakness.
1. During Asia’s currency crisis, several Asian currencies weakened dramatically against the US dollar. During the currency crisis, Asian countries such as South Korea sold gold to acquire foreign currency. This selloff led to the collapse of the gold supply and demand balance.
2, In a faltering global economy, the US economy was experiencing solid growth, causing investment funds to flow into the US financial markets. This market environment discouraged an inflow of funds into the gold market, causing gold prices to stall.
The weaker gold prices drove some central banks, major bullion holders such as the central banks of Belgium and Holland, to sell their gold. Consequently, fears of a sell-off spread throughout the entire gold market.
However, the Washington Accord in September 1999, which called for a restriction on the sale and lending of gold by major central banks, halted the fall in gold prices.
The latest trend shows gold prices continuing to hit new record highs due to brisk demand for jewelry and investment in East Asia and Middle East, reflecting growing anxiety about the U.S. dollar, the world’s key currency.
Gold’s International Market and Gold Prices
Gold is traded globally 24 hours a day, just like foreign exchange markets. The major markets for gold are located in London, New York, Tokyo, Hong Kong, and Zurich, but the price of gold always changes as it is constantly traded around the world.
The London market attracts the largest gold volume, with the daily traded amount reaching approximately 500 to 1000 tons. It is a traditional market founded in 1666, where five major bullion dealers*, the so-called *Five Gold Fixing members, gather to set the price of gold in the morning of weekdays. This price acts as the indicator of global gold prices.
The New York market has the second-largest gold trading volume. It is drawing increasing attention as New York is a financial center, focusing on futures transactions. Prices determined in New York have a huge impact on trading at the Tokyo market, which is the next market for gold trading.
The Tokyo market features a mix of spots and futures.
On August 10th, 2007, Gold exchange-traded funds, which are non-equity financial products, were listed on the Osaka Securities Exchange for the first time in Japan. However, since the OSE-listed Gold ETF products were designed to invest in securities that were linked to gold prices, they were not exchangeable for spot gold.
However, on July 30th, 2008, gold exchange-traded products, which are exchangeable for spot gold, were listed on the Tokyo Securities Exchange for the first time in Japan. They have been increasingly attracting attention as physically backed ETF products
* Scotia Mocatta, Barclays Capital, Deutche Bank, HSBC, Société Générale
Gold is traded in US dollars per troy ounce. A troy ounce is a unit used only for precious metals. One troy ounce equals 31.1035 grams. It is written as TOZ and is frequently called an “ounce” for short, but bear in mind that an “ounce” for precious metals is different from a normal ounce, with the latter being 28.35 grams per ounce. Therefore, if you see a headline “Gold tops $350,” it refers to a dollar-based price per troy ounce.
In contrast, when a headline says “Gold price tops \1300,” it is talking about the gold price in yen per gram. The gold price in dollars is converted into yen based on the prevailing exchange rate and then the yen price per troy ounce is converted into a price per gram.
Therefore, domestic(Japanese) gold prices are highly susceptible to trends in foreign exchange markets. Assume that the dollar-denominated international price remains unchanged, the domestic gold price drops when the yen appreciates against the US dollar or rises when the yen depreciates.
Supply and Demand for Gold
Demand for Gold
Demand for gold can be broadly classified into fabrication demand and investment demand. Fabrication demand for gold is in turn divided into jewelry goods, electronics, dentistry, medals, coins, and other sectors. Jewelry accounts for a large portion of fabricated goods. Investment demand refers to gold held by central banks and individuals as financial assets such as coins. Total demand in 2009 rose 8.3%
The reason for this is that global investment in gold jumped by more than 900 tons, outweighing the decline of around 500 tons in fabrication demand. Implied net investment showed remarkable growth of 333 percent, reaching 1,429 tons, a response to the massive inflow of funds into ETFs in the first quarter and later the inflow of funds into Comex.
In contrast, bar hoarding fell by 52% to 187 tons, largely because of a substantial decrease in East Asia, the Middle East, and the Indian subcontinent. Jewelry demand contracted about 20 percent to 1,759 tons, the result of a rise in gold prices and the impact of the economic crisis. Also, producer dehedging rose to 254 tons with Barrick’s buyback.
Source: Gold Survey 2009 (GFMS)
Supply for Gold
Gold supply for 2009 saw growth in mine production to 2,572 tons, which is growth of 7 percent, or 163 tons, and a sharp 27 percent rise in old gold scrap to a record level of 1,674 tons. Net official sector sales came to only 41 tons, representing a large drop of 82 percent, but, total supply grew by 330 tons.
Last year’s increase in mine production on a tonnage basis is the second largest in history, after the record in 1988.
A breakdown of total supply shows 324.0 tons for China, 222.8 tons for Australia, 219.8 tons for South Africa, and 219.2 tons for the United States. By region, China, which stays on top, and Asia centering on Indonesia recorded sharp increases in gold production. Production growth was also seen in South America, where new mining projects began operation.
In total, few countries experienced sharp declines in gold production; the United States and South Africa, which had the largest declines in output, both saw output decline just over 10 tons.
Source: Gold Survey 2009 (GFMS)
Characteristics of Gold
Characteristics of Gold
Gold is a malleable, ductile metal with an atomic number of 79, an atomic weight of 197.3, a specific gravity of 19.3, and a melting point of 1,063 degrees. The yellow metal can be beaten as thin as 0.1 micrometers of gold leaf and a single gram can be stretched to 2,800 meters. Gold is also an element that has a bright yellow color with high stability against water, air, and acid, except for aqua regia (nitrohydrochloric acid)*. Moreover, gold’s properties are superior to those of any other metals because of its higher conductivity to heat and electricity, giving it outstanding workability.
*A liquid that is a mix of concentrated hydrochloric acid and moderate amounts of nitric acid
Gold’s Economic Characteristics
Gold has a long history as a symbol of wealth. The following summarizes gold’s economic characteristics:
Only five to seven grams of gold can be extracted from one ton of gold ore. In all of history, it is said that only about 140,000 tons of gold have been mined, barely enough to fill three Olympic-size swimming pools. Resources likely to have economic value are said to be equal to one and a half Olympic-size swimming pools.
2. Value Uniformity
Gold can be easily divided, without compromising its value.
3. Readily Transferable
Gold is easy to transport.
4. Fair price
Stable markets are available for gold with fair prices.
5. Inherent Value
Gold has inherent value as an asset. Although currency and bonds can be reduced to worthless paper as a result of wars and rapid inflation, gold never loses its value under any circumstances.
*This website is not intended to be an inducement to engage in investment activity. Any investment decisions should be made at your own judgment and responsibility.