1. Wealth and economic expansion
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Economic expansion drives demand for jewellery, technology and long-term savings, so there is a positive correlation between gold prices and economic growth. The impact is particularly pronounced in developing countries, including China and India, that see gold as a luxury product and a store of wealth.
2. Market risks and uncertainties
Market risk and uncertainty are also significant for gold’s long-term performance. Many investors see gold as the ultimate safe-haven asset, a hedge against currency devaluation, high inflation and other systemic risks. Basically, no one can perfectly capture the specific uncertainties affecting gold, but economic and political uncertainties may account for a large part of the explanation.
3. Opportunity cost
The opportunity cost is the value of the most profitable option out of the ones we didn’t choose, so when an investor chooses gold, the interest rate on a near-risk-free bond becomes the opportunity cost of holding gold. When inflation is higher than bond yields, gold becomes a very attractive investment. And because gold is priced in dollars, a weaker greenback also boosts investors’ appetite for gold.
4 . Market momentum and position
Price momentum or similar trend changes could also further strengthen or weaken gold’s performance. In January 2020, global holdings of gold ETFs and similar products rose by 61 tonnes, with net inflows of $3.1 billion and total holdings reaching a record high of 2,947 tonnes. In addition, the attitude of global investors can be observed based on the long/short position of global gold futures. Finally, there are central banks’ gold reserves, which have driven demand in recent years as they diversify their money reserves from paper currency accumulation into gold.