Reasons Why The Value Of Gold Changes
- Written by NewsServices.com
If you're thinking about buying gold as a store of value, you should know the reasons that determine its price. These factors include Supply and Demand, Interest rates, and political uncertainty. Let's explore a few of them. Then, make sure you buy gold with an eye toward its future value. In addition, you should never underestimate the importance of buying gold for investments, especially if you have an eye toward investing in it for retirement.
Demand
Demand for gold bullion is influenced by prevailing trends and sentiment. There are seasonal periods when demand is strong as during September, western jewelers build up their inventory of bullion, which you can learn more about by clicking the link. During periods of financial instability, demand for bullion tends to rise as investors look to secure their wealth with physical assets.
Hence, the value of bullion fluctuates according to prevailing trends. There is a finite supply of bullion. Thus, the value of bullion fluctuates with changes in supply and demand. The largest purchases of Bullion occur in the Indian and Chinese jewelry markets. Indian bullion demand increases during the wedding season, which is traditionally in October.
However, people without disposable income may not buy bullion during these times. This is one of the reasons why the demand for bullion varies so wildly during the wedding season. The Federal Reserve's monetary policy influences the price of bullion. Interest rates represent the cost of borrowing money. If interest rates are low, the cost of borrowing money is low. Low- interest rates have a positive impact on bullion prices.
Furthermore, low interest rates weaken the nation's currency and lower bond yields, making bullion a more appealing investment. But how does this influence bullion prices? The answer lies in the demand for bullion. While there is no meaningful investment growth rate in bullion over the past 2,000 years, it moves higher when economic conditions worsen.
Bullion prices have fluctuated over the last decade. In February 2005, the price of bullion rose to a high of nearly $2,300 per ounce. It then fell back to $1,300 and then recovered towards the peak. By February 2011, bullion prices were back up again, and a year later, they were trading at around $1,600. This trend has continued throughout most of the last decade.
Supply
When bullion prices fluctuate, it's often because of supply and demand economics. Gold's value decreases when the economy is doing well, and rises when the economy is not doing so well. The monetary system is also a factor, as changes in interest rates affect the demand for gold. Gold has a lower opportunity cost than other investments, so it tends to rise in value when interest rates are low.
Currency fluctuations are also a big factor. Currency value changes are impacted by various factors, including inflation, monetary policy, imports, and demand. Gold prices in India fluctuate significantly based on the value of the Indian rupee. When the rupee falls in value, imports of bullion become more expensive.
Because of this, India's bullion prices increased dramatically. But currency fluctuations are only one part of bullion's story. Regardless of the reason, the bullion price fluctuates due to demand and supply. There is a limited amount of bullion in the world. As such, the price will rise if demand is higher than supply.
Thus, it is a valuable asset for diversification, as it is a stable investment with minimal volatility. Erb and Harvey also noted here that the price of bullion is positive elasticity, meaning that it moves up with demand. In other words, there is no fundamental basis for the price of bullion.
On the other hand, if supply is high, prices will fall. Inflation is another factor that can affect the price of bullion. Inflation drives up the price of bullion. Conversely, low inflation can weigh on bullion's value. Other factors that affect bullion prices are local taxes and distribution costs. Because bullion prices are sensitive to the dollar, a weaker dollar will lower the price of bullion.
Interest rates
The price of bullion depends on many factors, including supply and demand. But many commentators also mention the risk of interest rate hikes and inflation. Resulting in a correlation between interest rates and bullion prices. Real interest rates are the equivalent of nominal interest rates, less the inflation.
These rates measure the change in purchasing power of safe debt investments over the course of one year. While bullion's value fluctuates, interest rates are a primary factor in setting the price of bullion. When interest rates increase, the stock market suffers. Rising rates cause investors to rebalance their portfolios to a greater extent, resulting in a decline in the price of stocks.
Higher interest rates mean higher financing expenses for companies, which can affect net profit margins. Therefore, bullion is more attractive when interest rates are low. Although this is not the case all the time, it has been a trend over the years. Rising interest rates make fixed-income and bond investments more attractive, which in turn pushes the price of gold down.
As interest rates rise, money flows into these higher-yielding investments. When the Federal Reserve increases the federal funds rate, the price of gold should fall as well. So, while gold prices tend to rise in response to interest rates, other factors are more likely to affect the price of gold in the long run.
