Despite the fact that gold has lost the status of the payment instrument, this precious metal remains 'a safe haven' for investors in the times of economic crises. In different periods, demand for gold rises and falls, so its price changes upward or downward.
Supply and demand for gold
To understand the principle of gold pricing, you need to determine the components of supply and demand for the metal first.
Demand for gold consists of three main parts:
- investment demand — covers 45% of total demand. It includes the demand for gold of foreign exchange foundations, national banks and buyers of gold bars and coins;
- physical or jewelry demand also covers 45% of total demand. It is formed of the plurality of bids to purchase gold jewelry. The main consumers — China, India and the Middle East ;
- demand in medicine industry – it covers the remaining 10% of the total demand. In this case, the gold is mainly used to meet the needs of electronics and dentistry.
Supply of gold is formed from two sources: from the miners and central banks. Most of the gold is mined in China and South Africa, followed by USA and Australia and then Peru, Indonesia, Russia and Canada.
Central banks consistently provide both demand and supply for gold. The biggest gold reserves are in the central banks of USA, Germany, and the IMF.
The factors influencing gold prices
Supply and demand for gold like any other commodity are constantly changing. Accordingly, the gold prices increase or decrease. The greatest value of precious metals is observed in periods of economic and political crises. At this time, investors begin to convert their assets into gold to save them from depreciation. After the end of a crisis and economic rise, interest in gold gradually fades and its price reduces.
There are other factors influencing the price of gold. These include:
- Volume of gold in the market. When supply of gold in the market declines, its price will increase. This situation occurs, for example, after natural disasters causing a stop of gold mining companies' work.
- The rate of dollar. The price of gold is inversely proportional to supply of the dollar rate. During the depreciation of the dollar against the euro, the value of precious metals increases and vice versa. The exception can occur in the opposite situation, when gold and the dollar are getting more expensive at the same time. However, such processes usually do not last long.
- The national banks' activity in the developed countries. If the national bank decides to increase the country’s foreign reserves, it starts to buy gold actively. It leads to increase in demand for the precious metal and, consequently, to increase of its value.
- Rumors on the world market. This factor can cause excitement around the precious metals, which leads to increase in demand and raise prices. The rumors about the change in the economic or political situation in the developed countries are also sensetively perceived.
- The London metal exchange. World gold prices are guided by the price established by the London metal exchange. This structure is the largest trading platform of precious metals. Here two times a day gold prices are set in three currencies: dollar, euro, and pound sterling.
Role of gold as an asset
Gold does not lose its value at all times. Therefore, in periods of crisis and economic uncertainty, investors prefer to relive the «storm» moving their assets to gold. This precious metal is known as the «safe haven» when there is a threat of the national currency devaluation.
Gold is an excellent investment tool. Buying gold is not taxed. It is always in demand. Gold never falls significantly in price and is the most reliable financial asset during the last 100 years.
In addition, gold is an indicator of the trading market. Traditionally, if the cost of the precious metal grows rapidly, we will expect changes in the prices on the other goods. During the periods of the greatest gold prices, there is a maximum depreciation of dollar on the background of rising inflation. The stock market downturn is expected afterwards. These laws allow investors to consider the threatening phenomena and to transfer their assets in precious metals.