Basic Understanding on How Gold Gains and Loses Its Price

Gold is now priced is at least 1800 USD per troy ounce as of 23rd September 2020. Which fell from its record high on 6th of August 2020 priced at 2075 USD per troy ounce.

Before we get into the topic, we must first know about what is gold and why is it sought after? Gold by definition is a precious, shiny, soft, yellow-ish colored metal which is used for many things, gold has been used for thousands of years by almost all cultures worldwide that are now extinct to ones that still exists. The usage of gold is ranged from decorations, currency, manufacturing electronic devices and in some cases even for medicinal purposes.

Now let’s get back into the topic, there are thousand and one reasons why gold prices is affected but here are some of the more common factors on what causes changes in the increase and decrease in the price of Gold:-

1. Supply/Demand

Basic economy taught us the how supply and demand works. When there is a demand therefore supplies will be created to satisfy those demands. In this case, people tends to buy gold at a cheap price and would later sell them when they have made profits that is enough to cover their margin and gain profit. When there is too many supply of gold in the market, the price would ultimately drop and when there is a lack of supply, demand would raise and making the price increase at the same time. Just like what happened recently where those who bought before 6th of August managed to reap a lot of profit as gold prices was increasing tremendously from 17 July until then. Put it in easier terms, those that bought gold on 17th of July made a profit of roughly 275 USD per ounce.

2. Government Policy

Government decisions greatly affects gold prices when the reserve bank of any country declares their interest rates, annual gold acquisition or many more. This will result on multiple effects on market sentiment, which could change the price of gold in a good way or bad. For example, the government is the cause for burden of financial bailout packages in a time of crisis, taxations on assets and many more.

3. Mining/Production

Production means of a company creating products and services and putting them into the market for consumers to buy. This is also affected by supply and demand, companies normally create just enough produce to cover the demanded quantity in the market. But when they overproduced, there would be an excess produce in the market which will result in the price dropping and if they produce less than the demanded quantity, they would not have enough products to provide to the market this applies to almost all commodities that exists.. Therefore making the price higher as those with more money can bid higher and higher for the product. In this case when any mining company is suffering due to unforeseen circumstances and affected their mining produce, this can greatly increase the price of gold as there would not be enough produce to meet the demands of the market and only the highest bidder can get it.

4. Inflation

Gold is a great protection against inflation. But why is it that when there is an inflation, and gold prices would soar high? This is because, gold is one of the commodities where it is priced worldwide in US dollars. And when comes inflation everything would have their value lowered, US dollars included. Therefore, you will need to get more of those devalued US dollars from the gold that you own. And when the economy gets better, which it normally do. All those converted Dollars are now worth more than what it was during the inflation, making it a good investment.

5. Uncertainty

When there is an issue to the growth of economy such as a pandemic or any other economic crisis, it normally affects the stock markets, financial ecosystem and global trade. Which will result in fluctuations in demand and supply, making the market volatile. In these kind of scenarios, people would turn to invest in assets where gold is normally the usual go-to choice.

These are just a few, basic factors that almost everyone knows on how gold prices change. But keep in mind that these are not the only contributing factors, there are many more seen and unseen factors that affects in the rise and fall of gold prices.

By Areez Jufri | 24 September 2020

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