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What Factors Determine the Price of Gold?

When you think about gold, you might typically imagine either jewellery or perhaps gold bars. Those of a pirate-y bent might also think of gold coins in a treasure chest.

Smelting of gold began in ancient Egypt some 5,600 years ago, and it took nearly a thousand years for it to start being made into jewellery by the Mesopotamians. All this time later, gold still fascinates us, and the pursuit of it has made the poor wealthy and driven the wealthy to war.

In today’s world, gold is sought after for more than jewellery and wealth; gold is a component in medical and other electronic devices. The value of gold had risen considerably over the past few decades, but what are the factors that determine the price of gold?

Does the Central Bank Reserves determine the price of gold? 

Central banks have reserves of both gold and paper money. The reserves of many nations consist mostly of gold, and as central banks diversify away from paper currencies toward gold, the price of gold will typically rise.  According to a report from Bloomberg, the largest buyers of gold are global central banks. In 2018, Russia, Turkey, and Kazakhstan were the biggest buyers of gold.

The US dollar is largely responsible for determining the cost of gold, with the value of the dollar and the price of gold being inversely related. This is because a strong US dollar serves to keep the cost of gold lower. When the dollar is weak, more gold can be purchased, and this increased demand drives the cost up.

Does Global Demand for Jewellery and Industrial Components affect the price of gold? 

According to the World Gold Council, nearly half of all demand for gold was related to jewellery, with the greatest consumers in terms of the volume being India, China, and the US. Roughly 7.5% of demand relates to technology and industrial usage.  Supply and demand directly impact the cost of gold.

  • Financial Security

When there is concern about the stability of the economy, greater numbers of people begin to invest in gold due to its persistent value. Many view gold as a safe haven to invest in during economic or political uncertainty.

  • Demand for Investment

Approximately 25% of the demand for gold comes from exchange-traded funds (ETF) that retain the gold but issue shares that can be bought and sold by investors. In some cases, these ETFs hold shares in mining companies, as opposed to the actual gold.

Does the price of Gold change with production rates?

As mentioned above, supply and demand impact the cost of gold, so it is logical that worldwide production is a major consideration. The most significant suppliers of gold include China, South Africa, the US, Australia, Russia, and Peru.

One major issue with the production of gold is that miners now have to dig deeper than ever before to reach deposits of gold. This results in a greater environmental impact, as well as exposing miners to greater hazards. Mining costs have therefore risen, resulting in greater expense for less gold.

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Ultimately, there is no one single factor that drives the price of gold; several factors come into play, often driving the price higher, making this already-precious metal even more sought-after. Speak to the experts at Canada Gold to learn more about gold prices.