For as long as we can remember, gold has been known as one of the most traditional forms of investment. The price of gold was already on the increase before the COVID-19 pandemic happened. Now, the Ukraine and Russia war has ignited renewed investor curiosity in the yellow metal as general markets struggle.
In 2023, gold continues to show its true potential. We must discuss several factors that influence the price of gold and why it's continuing to rise in value as each year passes.
Demand and Supply
Like with any traded commodity, the demand and supply of gold play a critical role in determining its price. It's important to note that gold isn't a consumable product like oil. All the gold that has ever been mined is still available around the world. While the level of gold mined each year isn't considerably high, should the demand for gold keep increasing, so does its value. This is because the supply is relatively scarce.
If you're wondering why gold continues to rise in value, demand and supply conditions could be the leading factor. In January, the World Gold Council stated that the annual gold demand would increase by 18% in 2022 at 4,741 tonnes. In fact, the demand for gold has been at its highest since 2011, with the core reasons being driven by strong retail investment and central bank buying.
With fixed mining costs high (fuel costs to run the mines are at record highs), any fall in the gold price can lead to mining becoming uneconomical. This dynamic provides a great safety net by tightening supply if gold prices start to drop, thus supporting the underlying value.
Global Crisis
Because gold prices normally increase when one lacks confidence in financial or government markets, this often gets referred to as a crisis commodity. World events tend to have a substantial effect on the price of gold. This is because gold is perceived as a form of safety amid geopolitical or economic tumult.
For instance, the price of gold rose straight after the Russians moved into Ukraine. When this happened, people became doubtful about geopolitical stability in the region. Military action may also increase reassurance with geopolitical situations. In a nutshell, political chaos equates to more demand for gold, especially as it's seen as a safe haven.
Gold has historically competed with the US Dollar to be the top safe haven choice. As The Federal Reserve begins to slow its rate hikes and eventually start to reduce them again, the Dollar will fall in value, further pumping gold.
Health
As we saw the catastrophic consequences of the COVID-19 pandemic in 2020, health crises like this had a huge effect on the price of hold. Pandemics impact economies in numerous ways. These include weaker government finances, mass unemployment, and reduced GDP.
In general, all the above create uncertainty and risk which drive investors to look into purchasing gold as a safe haven investment. Should another outbreak happen again, we will most likely see a rise in investors splurging in gold which will drive the price of the yellow metal further.
Investment
When institutional and investor demand to purchase gold rises both in the U.K. and across the world, it can dramatically increase its value. Gold can be bought by hedge funds, pension funds and Central banks around the globe. With global recession a possibility and mainstream markets falling, more institutional money is flowing into the gold market. Retail investors are also contributing to increasing gold investment demand. Many are shifting money out of banks and equities, to diversify into physical gold coins and bars.
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Inflation
The rising cost of services and goods is known as inflation. Economists believe that the value of fiat money is corroded as a result of this process. Looking from another perspective, inflation that's at a controlled level indicates a healthy growing economy. This theory is supported by the reality that wages are able to buy less goods as inflation pushes up prices.
In an inflationary economy, it is believed investors like to opt for gold over cash due to its historical performance in high inflation environments. This is because the former is generally considered as stable. Because of this, the demand for gold and its price continues to rise during such times.
Global Jewellery and Industrial Demand
Large countries like India, China and the United States require and purchase a huge amount of gold for jewellery production. Even if changes are not so dramatic, their cumulative interest for gold can affect price changes. The price of gold is impacted by global jewellery demand. This means when global jewellery demand increases, the price of the yellow metal will likely follow suit. The same can be said should the demand fall, prices will normally do the same.
It's important to keep in mind that gold has some industrial applications. These contribute toward the global demand for gold. Gadgets and electronics, for instance, can have gold components. Because of this, gold prices are impacted by global industrial demand too. The jewellery sector in the U.K. and worldwide continues to soar, meaning the price of gold will follow suit.
Economic Data
Another driver of gold prices is U.K. economic data. This data like job reports, wage data, and broader-based data like GDP growth influence the central bank's monetary policy decisions. All this can impact gold prices.
While it isn't set in stone, a healthier U.K. economy – low unemployment, manufacturing expansion, and jobs growth have a tendency to push gold prices lower. A healthy economic growth indicates that the central bank could make moves to tighten monetary policy. On the other hand, weaker jobs growth and rising unemployment could see a reduction in interest rates and rise in gold prices.
Quantitative Easing
Quantitative easing (Q.E.) refers to a central bank's strategy of buying securities to boost the money supply. By flooding financial institutions with money, central banks like the Bank of England hope to encourage banks to loan more money and boost the supply of money. Other central banks have implemented this strategy around the world, including the Federal Reserve, and the European Central Bank.
A bigger money supply pushes interest rates down. This may encourage investors to purchase gold thanks to the lower opportunity cost. However, should this be overdone, such tactics can result in inflation which is another indicator of a rising price of gold.
The past decade has witnessed dramatic QE money injections into the world's major economies. This acts to erode the value of paper money over time and enhances gold’s appeal and demand.
Government Reserves
Central banks like the Bank of England hold both paper and gold currency in reserve. In fact, several European countries hold the bulk of their reserves in gold. What's more, they've been purchasing more gold for these reserves in recent times. Traditionally a majority of all central banks’ reserves have been held in US Dollars as the ‘world’s reserve currency’. But with Dollars depreciating dramatically each year and more countries wishing to rely less on the US, this proportion is diminishing and instead going into gold.
Other countries that hold gold include Italy, Germany, France, Portugal, and Greece. When these central banks begin buying gold in larger quantities than they sell, this inevitably drives the price of gold up. The reason for this is simple – the supply of currency continues to increase, which means available gold becomes more and more scarce.
Gold is used as a standard of value for currencies across the entire globe. The price of gold gets stated as currency value, normally in U.S. dollars, and the price of the yellow metal can differ depending on market conditions. Having a thorough understanding of what influences the price of gold can be highly useful for investors with an interest in gold trading.
Many of the factors above are the reasons why the value of gold is increasing in value. As long as there is supply and demand in the field, gold will always be a safe-haven asset for investors around the world.