This question preoccupies the mind of everyone who is directly or indirectly related to the investment in gold, in some or the other form. Gold has always occupied a prominent position in determining the global economy. The price of gold is considered as a major indicator of the status of global economy.
There are basically five main factors that affect the price of gold. They are:
1. Value of US dollar
2. Demand for jewellery by the Asian and Chinese markets
3. Central Banks Reserves
4. Production of gold
5. Rise in investments in gold
The foremost factor that governs the price of gold is the value of US Dollar. A stronger US dollar will keep the price of gold controlled and low. A weak dollar will set the price of gold spiralling to a very high price. US economy plays a major role in shaping the macroeconomics of the world. When the dollar is strong, people invest, buy and trade in dollars.
However, in recent times, the US economy has suffered a lot. Dollar has not remained as powerful and promising as ever; this is the reason why people and nations start investing and hoarding in bullion. The high gold reserves strengthen the national economies and act as a hedge against inflation.
Since the past few decades, whenever people sense that the dollar is showing weak performance in the world and stock market, they start investing in gold-funds or gold coins. Bullion is bound to give them more value for their money, and this increases the demand in gold. As with all other commodities, gold is also dependent upon the demand and supply formula.
China and India are the biggest buyers of bullion for their jewellery market. In the year 2004, Chinese citizens were granted the ownership of ignot for the first time in history. This triggered a very high demand of bullion, which subsequently affected the price of bullion worldwide. In 2009, a record 32% decrease in the demand for gold-jewellery was recorded, due to the global economic crisis, which resulted in a slight decline in the gold-price.
Central banks keep ignot reserves as a hedge against inflation. Other monetary policies of the central banks also affect the price of gold. Low interest rates discourage people to invest in paper money; they turn towards the golden metal in the hope of better returns. If the central banks give high interest rates, the chances are that the ignot price will fall.
Due to the rising cost of production in gold mining, strikes by gold-miners, worsening political situation, the sharp increase in the oil prices after the Iraq war, and terrorist attacks, a decline in the gold-mining production has been recorded for the past 5 years. The world population is constantly rising, and so is the demand of investment in bullion. Man has always believed in investing in bullion since ages. So, the prices of gold are also affected by the natural desire of man to hoard gold.