Factors Affecting Gold Prices

Gold is precious, traditionally valuable, and stable. That last one piques interest if you ask us. Why is gold so stable? Or a better question is, has it always been? In this article, let us address what REALLY affects the gold price:

1. Demand and Supply: Like any commodity, the imbalance between supply and demand affects its price. Gold is one such commodity that is always in demand, and hence its costs are often in an upward trend.
2. Inflation:?Gold prices react to Inflation. When the currency prices go down, the price of gold increases as it has a very stable store value instead of currency. Prolonged periods of high inflation result in higher gold prices as people tend to save money in gold.
3. Interest rates: Interest rates have an inverse relation with gold prices. Poor saving rates make people want to earn via the commodity route, and gold is preferred. Increased demand increases the prices of the metal.
4. Government reserves:?When the central bank decides to buy more gold than it offers to sell, there is a squeeze in the supply, and the prices shoot up. This is also an indication of the country's economic situation, and people would want to increase their exposure to the metal, thereby reducing volatility and risk.
5. Geopolitical factors:?Conditions that affect an economy on the geopolitical front often aid gold prices. Fear, uncertainty and doubt (FUD) often created during turmoil convince people to buy more gold.

But then again, has gold seen more considerable volatility–because of reasons besides the macroeconomy, maybe?

The global financial crisis triggered in 2008 after the fall of The Lehman Brothers (the fourth largest investment banking firm) set into motion a series of events responsible for the Great Recession. This resulted in the price of gold rising from $700 an ounce (about 28 grams) to about $1900 an ounce by 2011. A significant reason for this was that people had lost faith in the institutions.

Such events are called black swan events and are rare. More importantly, gold has usually outperformed all other assets during these events. It’s difficult to ignore gold’s risk-free and time-proof nature.