When YouTube personality Mark Dice made a viral video walking around the streets of Los Angeles offering pedestrians $25 for a 1 oz. pure bullion gold coin, no one seemed to be interested in his offer. Little did they know, that same gold coin was worth approximately $1,500 (at that point in time). The reason he didn’t have any takers is understandable. Most people don’t really understand the value of gold. That’s because the actual price of the precious metal is determined by several external factors. In this piece, we will delve into five of those factors.
Before we begin, just keep in mind though: These are factors that could affect the price of gold. They don’t always do, and it’s hard to predict the magnitude of their impact – if it takes place at all.
After the UK voted to leave the EU, bullion jumped almost 20% as investors sought a safe haven from the falling pound (after it fell to its lowest level in 30 years). That’s because gold is considered by some people as a safe haven asset. This means that when people lose confidence in fiat currencies like the Pound, the US dollar or the Euro, they see gold as a secure hedge against unstable currencies that are prone to dramatic fluctuations following political and economic events. Such events can often impact gold prices.
Not only is gold is traditionally viewed as a safe haven asset for currencies, it’s also viewed by some investors as a safe haven against inflation. That’s because when an oversupply of fiat currency like the dollar is printed into circulation, investors will often hedge the currency’s devaluation by buying up gold. This type of reaction could drive up the price of gold.
On the first Friday of every month, many traders will anxiously anticipate the non-farm payroll report. This is a report that is released by the US Bureau of statistics which records the overall unemployment rate in the United States. The reason so many online traders use this report is because it gives them a key insight into the health of the US economy. If the jobs report is weak, it is oftentimes an indication of a weak US economy. And if the US economy is weak, the dollar could follow suit. And if the dollar is weak, gold could rise in value. That’s because as stated previously, gold is seen as a safe haven asset. This report is just one of many economic indicators traders use to better understand gold’s worth. Others include the GDP report, homeownership reports and retail income reports.
Gold investors will often mark off the Federal Open Market Committee (FOMC) in their calendars which takes place approximately every six weeks or so. In this highly anticipated meeting, the Federal Reserve, which is the central bank of the United States, will decide whether to raise interest rates, cut them, or keep them in place. Since the Fed bases their decision on economic data, they will usually look at the most recent statistics to help decide the fate of US interest rates. If economic data is positive, the Fed could decide to raise rates. Lousy data could compel them to lower interest rates while stagnant data will often cause them to keep interest rates at the same level. This is not set in stone as there have been numerous instances whereby the Fed raised rates despite weak data.
Supply and Demand
Although it may seem obvious, it’s important to note that supply and demand have a real impact on the price of gold, especially since the world’s biggest consumers of the precious metal are located in some of the most heavily populated countries like India, China and the United States. When the demand for gold goes up, so too does the price. When the demand drops, the price will often follow suit as well. The difference with gold is that the supply is largely dependent on the rate at which it can be mined from the earth.
So if you are considering investing in the precious metal, you may want to do a little bit of homework before taking a position. That’s because when it comes to trading, all that glitters isn’t gold.
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