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The Forces Behind the Price of Gold

If you have recently become interested in investing in gold, you may be wandering about the forces that drive the price of gold. The commodity’s prices are so erratic and seem to rise and fall on a whim.

Understanding the market forces that act on the gold price is key to making smart gold investments. What is causing gold to fall as low as $1,320 after soaring close to $1,900 less than two years ago?

The Value of a Dollar

Generally, gold has an inverse relation to the strength of the US dollar. The stronger the dollar, the lower the gold price, and vice versa. We’re currently seeing high market optimism for the dollar, but unfortunately, it is most likely nothing but an economic chimera. The bottom will drop out of this house of cards. Once all that money the Fed has been printing starts changing hands, inflation is going to rise and we will see the real value of the dollar, as well as the real value of gold.

Gold Demand from Central Banks

Starting a couple of years ago, the institutions that were for a long time net sellers of the yellow metal ramped up their gold buying and changed their tack. They are now big time net buyers of the stuff. In fact, central banks accounted for over 534 tons of the gold bought in 2012. More emerging-market central banks, like China and Brazil, got in on the gold buying action. As more and more central banks diversify their reserves – out of currencies and into gold – the gold price will rise.

There can only be one explanation for central banks switching gears like this: they know that gold is going to be the only thing that will get them through the consequences of the loose monetary policies that they have been enacting for years.

Economic Uncertainty

Despite the Dow and S&P 500 clocking record highs in recent months, an intuitive look into the recent gold buying trends among central banks implies that the stock market won’t have so much to cheer about for long. Economic uncertainty is one of the biggest factors affecting the gold price, as it drives up demand.

We are currently seeing this driving force at play in the gold market right now. Gold demand is so high – two times the levels from last year – that the U.S. Mint has had to suspend sales of its smallest Gold Eagle coins to replenish its stock.

Jewelry and Industrial Demand

Worldwide jewelry demand, although on the wane in recent years, continues to claim the largest chuck of demand for gold. It is particularly strong in Asian countries, especially India, as gold jewelry is very much entrenched in the culture for use in weddings and festivals. Demand for gold for technology has remained steady, more or less, over the last decade, and is not as high as jewelry or bullion demand, but still plays an influential role in the gold price.

Gold Production

This, possibly more than any of the other forces on this list, could have an extremely powerful influence on the price of gold in coming years. Worldwide gold production is declining, as large deposits are becoming more and more scarce each year. Some analysts have even warned of an impending ‘production cliff’, i.e., no more gold in the ground, looming just around the corner, as soon as 2017. Such an event will put unprecedented strain on the supply of gold and will cause prices to soar.

Market Manipulation

Big banks and financial firms can use the media to their advantage, and ultimately swing commodity prices in their favor. For example, if Goldman Sachs wants to see a lower gold price, all they have to do is issue a press release saying that their researchers predict the gold price will drop (which they started doing in December). As more and more people take the firm’s ‘research reports’ at their word, the price slowly begins to dip.A month later, they can cut their forecast again and say ‘See? Told ya!’ The price slump that started in January can be mostly attributed to such self-fulfilling prophecies by banking behemoths.

Using this Knowledge

Now that you know the market forces that have an effect on the gold price, use that knowledge to your advantage. Gold prices are extremely low right now. It’s the perfect buying opportunity, and we won’t see one like it for a long time, if ever. Buy gold now to profit and protect wealth while it’s still affordable.

If you would like a free copy of our 2014 Gold Investment Guide, you can request one by calling 1-800-425-5672 or emailing us and one of our expert advisers will get back to you as soon as possible.

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