Gold is a symbol of power and wealth par excellence that has fascinated the world since Ancient times. It was shaped into coins and used as humanity’s very first currency. It also had divine value for Egyptians, who used it for tomb ornaments as a pathway for the soul of the deceased towards the sun.
Gold’s real universal value is virtually impossible to define and yet, the market must determine its price every day so business can go on all over the world. So what drives daily gold prices?
Considering the incredible technology that surrounds us it may seem hard to believe that the price of gold is still determined via phone calls, but that’s the procedure in a nutshell! Chairmen of five major economic players hold two daily conference calls to agree on a reference price for gold. The parties involved include Scotia Mocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale. This is a method that has worked as a query parameter for producers, consumers, investors and central banks around the world since 1919. It is also where the term “Gold Fixing” comes from. So how do the Chairmen decide on the price? They consider the following 6 main factors.
1- Variations in Production
This is the most predictable variable of the bunch. It is a matter of supply and demand. If gold’s exploration suffers cuts this will probably translate into less supply, thus raising gold prices. A similar situation may arise if gold production faces challenges getting to quality reserves – with time, easy to get to sources may become scarce.
2- Jewellery Industry Rules
The demand for goldsmithing can also impact the price of gold. According to the World Gold Council, jewellery demand was of 2,041.6 tons in 2016, which represented 47% of gold’s total demand. This outperformed investment by 36%, central banks acquisitions by 8,9% and technology by 7,4%. If demand for gold jewellery increases, gold prices could go up as well.
3- The Asia Factor
China is one of the three largest gold buyers and in 2016, alongside India, equaled 56% of the metal purchased for jewelry use. “China has a strong appetite for gold and that's been the case for years,” explains Matthew Michael, a commodities expert at Schroders. “They like gold because it is a store of value and the state is diversifying its official reserves.” Experts have suggested that far from pushing gold prices, China’s actions follow them, but Asia’s demand is key in the whole market, so if they ease back, the world would notice.
4- Political Uncertainty
Gold prices are likely to continue soaring in response to the potential negative economic effects of the Brexit, Donald Trump’s presidency and the Eurozone’s immigrant crisis. Gold is seen by many as a secure vault to protect their wealth in. Instead of buying dollars or other assets, the precious rock offers the feeling of stability. This is one of the explanations why gold investments peaked in 2016 after the Brexit referendum, or during the global financial crisis of 2008, which drove it to a record of $1.800USD per ounce on July 2011 —a rise of 90% against the three years prior.
Dollar and gold prices usually move together in opposite directions. US is the biggest importer of crude oil so when crude prices go up, the US will need more dollars to buy it. In other words, more dollars move out of the country and hence the currency weakens. Inflation could ensue in the process, prompting people to look for secure assets to protect their wealth. Gold demand would increase and that would push its price up. On the contrary, a strong dollar usually keeps the gold price low.
6- Interest Rates
Another situation in which investors opt for gold is when interest rates draw negative results. Fixed-term deposits and bonds could not be the best choice if the economy is facing an inflationary process. That is when gold emerges as the perfect safe haven to secure wealth.
These 6 items do not act alone. Movements in the price of gold are a complex matter. To delve deeper into this matter you can start by reading History and Trends of The Top Gold Rich Countries.
This article was researched and written with the use of the following sources: this article on Oro y Finanzas, Gold Org, The Telegraph, this article on Oro y Finanzas and this Quora note, and this Quora discussion.