While gold is considered a low-risk commodity, its per-ounce price can fluctuate due to several key driving influences. Below, we outline the factors that can affect the cost of gold month on month, year on year.
Demand and Supply
Despite being in use for roughly 5,000 years, gold remains one of the world’s most desirable precious metals – and it’s this which can impact its cost. Global demand for gold remains high, particularly in jewelry and manufacturing industries, so its price is affected by the basic theory of supply and demand (as in, when demand is high, prices rise).
Hedging and Wealth Protection
The innate value of gold means it can weather more economic uncertainty than other commodities, making it a safer bet for investors during turbulent periods. This, in turn, means it’s a popular hedging option, as it helps protect against economic shock from rising inflation and currency devaluation. Consequently, as more investors hedge on gold, its per-ounce price can soar.
The Value of the US Dollar
Since gold is a dollar-denominated precious metal, its per-ounce cost is directly affected by the value of the US dollar. So, when the dollar is strong, gold prices tend to be lower, and vice versa when its value drops. This is because investors want more gold for their money, so may wait until the dollar is weak before purchasing. The eventual knock-on effect is a higher per-ounce price due to increased demand.
Geopolitical Crises and World Events
Remember: gold is considered a safer bet for investors, so in times of global crises or geopolitical disruption, its demand can soar. The metal outstrips all other assets in terms of economic viability and stability. This is because gold’s cost of acquisition and product is rarely hit by significant fluctuations, the element is incredibly durable, and the supply is high enough to comfortably meet demand.
So, it remains the go-to fallback option when economies take a turn. Naturally, this increased demand for gold can cause significant price spikes.
Demand from ETFs
Gold is a popular asset within ETFs, where it’s bought and sold like shares. Unsure what an exchange traded fund is? Think of it as an investment vehicle, whereby investors can buy and sell commodities (such as gold) on a stock exchange like regular stock. Currently, ETFs represent a significant share of total gold demand volume, and thus have a major impact on its per-ounce cost. Note that at Glint, we do not deal with ETFs, the gold you buy with Glint is real, solid, allocated gold. There is nothing that stands between our clients and their gold.
Gold Production
Don’t forget that, unlike other modern assets, gold is a physical commodity available in finite quantities. That means gold production must come into the pricing equation, with the metal’s real-time supply volume affecting cost in the same way as demand. And, as time goes on and mining becomes more complex, we’ll likely see gold’s innate value increase as its raw material becomes more scarce.