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.