Data for the first quarter of 2021 shows a 37% rise in the demand for gold. Alongside this, it is predicted that over the year gold will average around $2000.
It seems like this year might be nothing short of exceptional for gold investors. Regardless, we are still seeing significant fluctuations in gold supply and demand, which are affecting the metal's price.
So really, what are the factors that are impacting the gold price?
Precious metals like gold have one famous trait: their scarcity and rarity enable them to be a great store of value. Generally, as currency is devalued because of inflation, gold acts as a hedge against it, holding its value long term. Regardless of the economic conditions, the purchasing power of even an ounce of gold can provide stablility. This is why the demand for commodities such as gold rises with rising inflation. The political environment does not impact gold's stability in times of uncertainty, making it a low-risk investment. Thus, when investors are doubtful of the future of fiat money, they turn to gold.
The Value of the U.S Dollar
The US dollar has been the world’s most important currency since World War II. It is the predominant currency in international trade because it is the worlds leading reserve currency. Gold’s price and the Dollar’s strength share an inverse relationship whereby the stronger the value of the dollar, the weaker is the value of gold, and vice versa.
Relationship with global events
The yellow metal is deemed to be a crisis commodity meaning that the price of gold is inclined to rise when people’s confidence in their governments is unstable. During times of economic difficulties and geopolitical tensions, gold is believed to be a source of safety. Hence, global events naturally have a direct impact on gold price fluctuations.
Instability in central banks
People buy gold as a safe haven when they observe central bank instability. The Federal Reserve is the central bank of the United States. Other countries have central banks or dominant ones like the Swiss National Bank. Bank failures or economic chaos pushes paper money into spells of uncertainty. Consequently, people turn to gold. It has been found that investors like to hol a tangible security, such as gold. This attracts more investment during instability. As a result, the value of gold rises further in response to increased demand.
More often than not, changes in interest rates are reflected in gold prices due to their inverse relationship. A good return on deposits is not guaranteed by a fall in interest rates. Investment in gold increases as the opportunity of carrying the yellow metal is lower than other investments. Similarly, when interest rates increase people lean towards selling it thus which softens the gold price.