With gold reaching all-time high prices of $2,070+ per troy oz in August 2020 it certainly has been an interesting time for gold investors recently.
Gold has risen from as low as $1,472 per troy ounce back in March 2020. What causes such volatility? Here we examine the many factors which influence the global gold price.
The following are supplied in alphabetical, rather than importance order. However, we start with “uncertainty” as this straddles all categories.
Uncertainty
Any type of uncertainty, which impacts financial markets could influence the gold price. These are discussed in the sections below, but a few examples of uncertainty would be economic data, pandemic and local epidemics, general market speculation and terrorism events.
Demand for gold
As with all economics the prices of a commodity rise, or fall based on “supply and demand”. One part of the equation is “demand”. If demand increases, the price does; If demand reduces, the price typically reduces too. According to information from Statista, the following 4 industries were the ones to use gold in 2019:
Jewellery (48.5%) – gold is used extensively in Jewellery manufacture and is particularly sought-after during Diwali celebrations
Investment (29.2%) – gold is a popular investment choice and is stored in coins and bars
Central banks (14.8%) – gold is a common investment vehicle for central banks, who often prefer to buy gold rather than hold currency
Technology and industry (7.5%) – gold is used in many ways; it is sought after for its conductive qualities. Gold is used in dentistry and technologies such as mobile phones and televisions
Economics
General economic situations and outlooks impact the gold price, in particular, the following:
Currency markets – as currencies move, this impacts gold, especially the gold price, which is primarily priced in US$
Data – as new data is released, it causes a reaction, based on uncertainty and risk. This impacts the gold price. Data could be in areas such as the balance of payments data, GDP figures, new inflation rates, manufacturing statistics, unemployment levels, etc.
Global inflation – high inflation = buy gold as a hedge, low inflation leads to gold sales
Interest rates – the level of interest rates matters. As rates rise, it makes sense to sell gold, as attractive other high-interest investments are chosen. Conversely, as rates reduce, gold becomes more attractive
Governmental & Political
Various government and political decisions will impact the gold price. Here are a few examples:
Monetary policy – central government policies (particularly the US), especially interest rates
Quantitative easing – central banks sometimes “print money” to stimulate economies. In general, this creates a huge demand for gold and hurts currencies
Terrorism – threats of terrorism and actual events often see heavy investments in gold as a “safe haven” investment
Trading in gold – in 2019, central banks bought 14.8% of gold produced. Central banks both buy and sell, this has a material effect on gold prices
Health
As seen by the COVID-19 pandemic in 2020, we can see that a health crisis can massively impact the gold price. Pandemics impact economies in multiple ways (e.g., mass unemployment, reduced GDP, lower international trade, weaker government finances, etc). In general, all of the above create risk and uncertainty and drive investors to buy gold as a safe haven investment.
Investment
When investors choose to buy gold in the UK and around the world it can dramatically increase/reduce the price of gold. For example, Eid celebrations in India can cause great volatility with the world gold price. Typically trading in gold and coins investments impact the gold price in the following ways:
Investment demand:
Buying – increased buying of gold will cause the price of gold to rise
Selling – increased selling of gold will cause the price of gold to fall
Market Speculation – perceived price changes in gold alone can cause the price to change. Traders’ and Experts’ comments can alone cause prices to rise/fall – it’s about sentiment and also to some extent “herd mentality”
Stock markets – as stock market investors buy and sell this can hugely impact the gold price:
Buying shares – increased share buying leads to reduced gold prices, this is because some of the finance will be from gold sales
Selling shares – increased share selling leads to increased gold prices, this is because some of the finance will be converted into buying gold
Supply
Gold production:
From mining (72.5%) – the world’s gold mines supplied about 72.5% of new gold in 2019
Recycling (27.4%) – Gold can be recycled in various ways as a new input supply. Recycling amounted to 27.4% in 2019, with about 90% of recycled gold coming from jewellery
Central banks – another way in which new gold supply can emerge on the market is from sale by central banks. Buying 14.8% of all gold in 2019, central banks will of course also sell gold, creating a new supply from time to time
Conclusion
Looking out for the above factors could provide you with good insight as to the future trajectory for the gold price, whether that is up or down. It’s always important to remember that the gold price is extremely volatile and varies upon a large number of factors, with all interacting to produce an overall price.