May 27 2016
Gold is an all-time favorite investment, popular with many people from all walks of life. Part of the reason for this is that it is seen as a buffer. In times of recession or even deflation, gold remains relatively safe. While investing in something like real estate is always a bit of a gamble, gold is much safer. This makes it a common go-to choice for investors sensing financial danger. It is, in many respects, the ideal form of insured wealth. However, that doesn’t mean that it is not subject to the whims of the financial world. Like anything else, gold is affected – and affects in turn – by outside factors. If you are considering investing in gold, then it pays to know what gold is most affected by. With that in mind, let’s take a look at the major factors which affect gold prices the world over.
There is a common belief, held for many years, that gold is negatively affected by rising interest rates. While at one point, this might have appeared to be the case, it is no longer always so. When the Federal Bank raises interest rates, in fact one of two things may happen. One possibility, the old idea, is that people sell their gold when the interest rates are raised. The theory is that this is in order to free up funds for other investments. However, the opposite is also often the case – and it is this second possibility which has happened this year. When the Federal Bank raised interest rates this year, gold prices actually decreased. The important thing to remember here is that gold prices are not a function of interest rates. There is a causal relationship between the two, but it is two-sided and complex.
The US Dollar is still very much the global benchmark currency. What it is important to bear in mind for our purposes is that the dollar is the dominant reserve currency. This means that, for many countries around the world, it is the go-to currency for trades on an international basis. How this affects the price of gold is interesting. It is, often, a strong inverse relationship that we see between the two. When the dollar is going strong, gold tends to be weaker. Of course, the opposite also applies equally.
During times of recession, one tactic which is often employed by central banks is quantitative easing. This is a process by which the central bank of a country releases more money to the banks. This, they hope, increases the banks’ likelihood of lending out money. The goal, of course, is to get the money flowing more freely again. What happens here is that a greater supply of money makes for lower interest rates over time. Sometimes, this encourages investors to buy gold. When enough people do this all at once, it can trigger inflation. This in turn has the possible consequence of gold prices rising again.
The relationship between gold and the rest of the financial world is complex, and ever-changing. These are just three of the major factors which affect the price of gold. If you are thinking about investing in gold, it is a good idea to bear these in mind.