Like many things in the financial world, the price of gold is complicated and it’s driven by multiple factors. Many folks want to simplify gold and they will say that the price has everything to do with the value of the US dollar. This outlook is a bit short-sighted, though.
The price of gold is dependent upon the dollar, but it also depends upon a host of other factors. In fact, supply and demand are probably just as important in setting the median price of gold in the United States and around the world, especially in today’s markets.
In order to fully understand gold prices and its sliding scale, one must grasp all of the factors that make an impact.
The value of the US dollar
You have to start with the value of the dollar, as this does help to set the price of gold to some extent. As many people know, gold is used to back up the money made in US mints. All around the country, federal mints and banks alike use gold as insurance for the money they print and contain.
What this means is that any major deflation in the value of the dollar will have an impact on gold. When the dollar is strong, gold has a tendency to skyrocket. It does not plummet nearly as much as some other investments when the US dollar value is low, however.
The principles of supply and demand
When looking at just about anything in the financial world, you have to consider supply and demand first and foremost. Looking beyond just the value of the US dollar, we can see how global demand for gold pushed the price through the roof in the early part of this century.
There are more than 155,000 tons of gold in the world right now and current consumption rates tell us that we only have a supply left to last just under 40 more years. Like with the oil situation, this pushes up the demand for gold now and when demand outpaces supply, the price of anything is going to rise.
What is shaping the demand curve for gold? Jewelry obviously plays a role in this, but there are other uses for gold that are similarly demanding. When talking about manufacturing and the like, gold plays a major role for many companies. That is a huge source, as well as the investment gold rush that has taken place over the last few years. With more people than every using gold for more reasons than ever, it figures that the price would continue to rise.
When looking at just what impacts the price of gold, you would be remiss if you didn’t mention some of the outside factors that have been known to shape the price curve.
When war takes place or there is some sort of international crisis, this can push the price of gold either higher or lower. Some struggles abroad will heighten concerns over gold’s availability, which serve to push the price higher. Other incidents hurt the US dollar a great deal and this can have the opposite effect on the price of gold.
There is no set standard for which way the price will move, since there are so many different moving parts involved in looking at this.
Things that fall into this category of outside influence recently have been the continued threat of nuclear war from Iran, the rising price of oil in the middle east, and scare with the US economy.
Long term scarcity
The fact that gold should continue to become more scarce as the years go on means that it will naturally rise in price over the years. As the supply lessens and more people want to consume gold for jewelry and the like, there will be greater demand. This is a long term trend that people need to consider when purchasing gold — even cheap gold — at this point in time.
Overall, understanding the price of gold and gold coins requires you to look at many different things and take account of a host of environmental factors, especially before you try to buy gold.
Gold does not operate in a vacuum and just about everything that happens in the world can have a direct or indirect impact on its price and value.