As one of the most special commodities, appearing for a long time and playing an important role at most times in the history of the economy, gold has not only played a large role in the military, the jewelry industry,... but also the standard for world currencies.
Therefore, every change in geopolitics, news always seems to be factors affect gold price and is associated with the volatility of this metal's price. If you follow the news regularly, you probably remember what news is often associated with the price of gold.
Below is an overview of the major factors affect gold price for all interested in this commodity.
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Why Does Gold Have A High Monetary Role?
Before we get into the factors affect gold price, we need to understand why gold is so influential in the economy.
Simply put, this is a metal of high quality and limited quantity. In which, the highest advantages come from the following characteristics:
- High aesthetics: With a brilliant, luxurious appearance and importantly, stable value over time everywhere. Gold is always the leading alloy when it comes to jewelry, high value and loved fine art. This also seems as one of many factors affect gold price in terms of demand.
- High liquidity: Generally regulated worldwide, gold has a long history of trading in every country. Moreover, it is easy to divide and can be cast in various shapes and volumes without losing its original value at all.
- High quality: If it is pure gold, this is a metal with a high crystalline solidity, so it is almost not corroded or oxidized by chemicals. Therefore, it is considered as a popular medium for long-term storage and also for other products.
Through the above plus points, anyone or any country wants to increase the amount of gold they own. With special properties, the detection of fake gold seems to be easy, so it is difficult to replace gold. Next, let's take a look at the factors that affect the gold price in detail.
Fun Facts About Gold
- Gold has long been a favorite among investors, and during the past 50 years, its price has significantly risen.
- Not only can gold maintain more value, but supply and demand—particularly demand from sizable ETFs—have a significant impact on the price of gold.
- Central banks and government safes are two significant sources of gold demand.
- Due to the metal's dollar-denominated status as an inflation hedge, gold occasionally moves in the opposite direction of the American currency.
- Mining activity is what essentially determines gold supply.
Factors Affect Gold Price
1. The Strength Of The US Dollar
The first in line of factors affect gold price is the inverse relationship of gold. The trader community often has an "unwritten rule" whenever news about the FOMC meeting or CPI is announced, the more the dollar depreciates, the more gold increases.
As the world's main currency, USD is also considered an investment asset in developing countries. When the USD price against the domestic dong increases continuously, holding gold becomes more expensive, making buyers less, selling more, causing the price of gold to decrease.
On the contrary, gold is also considered as one of the tools to prevent inflation when the US dollar depreciates. The situation that a series of large banks in the US are at risk of bankruptcy as in 2023 is the time when investors look to gold as a "shelter". Therefore, gold has outperformed since the US entered a recession at the end of 2022.
However, this is not always a factor affecting the price of gold, there are cases where both increase or decrease come from other reasons that emerge stronger. At a time of economic stagnation, buying gold is not necessarily safe compared to investment indicators or bank interest rates.
2. Global Economic & Political Situation
This comes from the nature of gold's price stability over time. History has shown that in any uncertain time, gold holds its value while other assets depreciate.
Therefore, gold is always a top priority in difficult times. This is approved as one of many factors affect gold price in 2020, the price of gold increased by 13% when the Covid-19 pandemic raged and blocked economies. At that time, gold was collected thoroughly for the national reserve for increased instability.
Similarly, from 2022 until now when the Russia-Ukraine war broke out, gold prices skyrocketed, up 34% in the first quarter compared to the same period in 2021.
3. Inflation Rate
Based on the reported results in the US, people and investors will move assets in and out with gold to preserve assets. Prices of petroleum, industrial and agricultural commodities; unemployment index; consumption index; interest rates from the Central Bank… together with the overall inflation rate will be a measure of the level of inflation.
When these indicators tend to deteriorate, the demand to buy gold increases, causing the gold price to increase because this is like a "storm shelter" for the waves of the dollar depreciating. This is understandable when inflation increases, the dollar depreciates, of course, buying anything will become more expensive than usual and it becomes one of the factors affect gold price.
4. Gold ETF
In addition to holding gold by physical means, buying directly at stores, everyone can own gold in the form of shares, fund certificates or latest electronic tokens. Exchange-traded funds (ETFs) such as SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), allow investors to buy gold with certificates issued by the funds themselves.
Each certificate listed on the New York Stock Exchange or each PAX Gold token will be equivalent to 0.1 to 1 ounce of gold stored in the London vaults of HSBC Bank USA and other branches. .
Because they are the largest gold trading organizations, the amount of gold these Funds hold can be up to 10,000 Ounces. Every time the Funds sell or buy in a sudden way is a factor affecting the world gold price. In 2008, SPDR sold 20.5 tons of gold, causing the gold price to drop to the lowest level, nearly 900 USD/ounce.
5. Supply & Demand Factors
Like any other commodity, the law of supply and demand is also the important one in the list of factors affect gold price. However, as a special commodity, the supply and demand of gold is affected by many factors. In terms of supply, in order to have a quality gold source, miners need to search for deeper gold mines despite weather and geological factors because gold resources on Earth are increasingly scarce.
Regarding the demand in the factors affect gold price, people in each country will have different needs for gold consumption from jewelry, accumulation needs, raw materials for production or investment. According to the report of the World Gold Council, Vietnam is the second country in terms of gold consumption when it reaches 31 tons in 2021.
6. Impact Of Oil Price
Another one of the factors affect gold price that few people think about is oil, because the price of oil is calculated in USD, so any fluctuations in oil price will also affect the USD exchange rate, leading to fluctuations in the price of gold.
Oil price is largely the result of socio-political events, so it will often be proportional to the gold price and inversely with the US dollar.
Billionaire Warren Buffett has said that when the market is scared, gold is the best long-term investment. To seize the opportunity to buy a good price zone, investors need to know the factors affect gold price in general.
Besides, gold is known to be an asset class that many people trust. But if investors choose the form of gold to make a profit, they need to regularly update information about the latest factors affect gold price and related commodities.