Gold is easily one of the most telling economic indicators of state of the national and global economy. First off, it backs many of the world’s most powerful currencies – excluding the dollar. And gold trading itself is a robust investment vehicle for millions of people.
However, it’s important to realize that just because gold pervades the economy so completely, and even though it’s an extremely reliable gauge of economic health, the spot price of gold dependent on many factors. As the most vivid of the precious metals, it has been valued by human civilizations since antiquity; and yet many people don’t fully grasp all of the factors that contribute to its worth, and why this worth fluctuates periodically.
For developing an optimal investing strategy in precious metals, such information can only help.
1. The Volatility of the U.S. Dollar
One of the most popular reasons why people invest in gold is as protection against the inevitable inflation of currency. This has been made easier by programs such as gold IRAs, which enable the average employee to allocate a portion of her paycheck automatically and enjoy certain income tax benefits.
The fact is the dollar is volatile – because of inflation and other factors – which is what encourages people to invest so strongly in gold in the first place. It is this investment strategy that pays off during economic recessions, as well as for long-held securities, but the surge in people doing this is also one of the reasons for gold’s volatility.
2. Mining the Precious Metals
Mining any metal has a significant effect on its spot price. Due to gold’s central role in the world economy, this effect is even greater. Think about this way: gold has been a valuable commodity for literally thousands of years. We’ve been digging into the earth for about that long looking for it, and the readily-available gold just beneath the surface has almost all been recovered.
As we have to dig further down, the cost of mining operations go up, which is of course transferred to the cost of gold on the market. This shift in the spot price is felt through all connected industries, from gold trading to jewelry prices.
3. The Wheeling and Dealing of the Federal Reserve
As you might expect, the machinations of the powerful central banks have a lot of influence over the price fluctuations of gold. No single person, within reason, is going to be able to buy or sell more gold that these financial institutions.
When the spot price of gold is on the rise that can usually be attributed to the fact that the Federal Reserve is purchasing more gold bullion than it is selling. Additionally, you can see how even this is tied to the volatility of the American dollar as mentioned above: people buy more gold when inflation is strong, which means they’re buying it from the Federal Reserve (for the most part). This action means the Federal Reserve is selling more gold than it is buying, which drives the price of gold down.
We’ve only scratched the surface of what drives gold spot prices, but it’s a start. Expanding your knowledge on what makes metals prices move and why will only improve your investing strategy in the future.