Fundamental Factors to Affect Global Gold Prices

Almost all commodities get their prices due to the production, demand and stockpile of that commodity. In case of gold this formula does not apply effectively since “gold is money”. Rather gold is valued indirectly and somewhat influenced by the U.S. economy. It is also noticed that the gold prices are higher if the U.S. economy is weak compared to the others nations.

Factors for Gold Prices

·         Gold and silver, both precious metals are influenced by other commodity prices. Gold mining costs and the investments from Chinese population also have links with gold prices.

·          Global money supply and inflation also affects gold prices highly. Tight monetary policies enforced in developed nations also affect the price of gold.

·          Gold and silver prices normally rise when there is global imbalance in trade. It also rises when debt grows against the United States. Alternatively gold and silver rises in price when emerging markets and Europe gets economic improvements but U.S. is unable to cope with this development. Euro still has a very strong positive relation with gold and they both normally move up and down together.

·         Reduction in imbalances in global trade reduces gold price. Higher investments and real estate prices in the U.S. also reduces gold price. This is because people anticipate higher interest rates which gold investments cannot give.

·         Gold prices are also linked to central banks’ activities. Central banks in Emerging Markets and Europe normally buy US treasury bonds or gold. The reason for this is that under-developed nations have the likelihood of high wage increases than developed countries. This high wages can translate into inflation. This inflation can depreciate the European or Emerging Market currency. This would again lead to hyper inflation. Therefore, buying U.S. treasury bonds or gold gives the chance of inflation-resistant reserves. These investments can also gain from the rise of dollar and/or gold.

·         Falling U.S. interest rates also changes gold and silver prices. American funds, especially the most famous ones drive global markets. If and when these investors invest in U.S. treasuries instead of gold the demand for gold and silver falls.

·          Despite being driven by various factors the age old supply and demand factor does apply to gold and silver too. Hence gold and silver price do change somewhat with physical supply and demand.