The present gold bull market has drawn more attention to investing in the yellow metal. Yet, many investors don't know much about the factors that affect the price of gold.
Unlike other investments, perceived value is a major factor in the gold price. There is a bit more to it than that, however.
Here are several of the top influencers on the price of gold.
What Influences the Price of Gold
Money Morning Resource Investing Specialist Peter Krauth gives readers regular insight into the "types" of money that move the price of gold. One of these is called "dumb money."
This refers to large speculators who trade gold in massive quantities. The latest report for gold from the Commitment of Traders (COT) indicates that these large speculators are continuing to bet on higher gold prices.
The other type of money that moves the price of gold is referred to as "smart money." This relates to the actions of commercial traders who are hedging against lower gold prices. These traders believe that gold is heading for a cooling-off period, and there has been an 11.5% surge in these trades over the past three months.
Other Influencers on the Price of Gold
Aside from the two influencers just mentioned, there are several other factors that influence gold prices. Among them are:
- Value of the U.S. Dollar – The value of the dollar, or more specifically the U.S. Dollar Index (DXY), has a significant influence on the price of gold. A weaker U.S. dollar tends to drive the price of gold higher, and vice versa. On April 19, the DXY hit 94, its lowest level since mid-2015.
- Inflation – A common reason for investing in gold is to hedge against inflation, so it would follow that in periods of higher inflation there will be much more interest in the asset. In fact, simply the fear of inflation can drive up the price of gold.
- Central Bank Reserves – The world's central bank actions influence gold prices in that they hold both paper currency and gold in their reserves. When they begin buying more gold than they are selling, the price of gold rises. Several nations that have reserves composed primarily of gold include the United States, France, Germany, Portugal, Italy, and Greece.
- Worldwide Demand and Supply – Only about 2,500 metric tons of gold are produced annually in the world, and the world's total supply of gold is limited. The price of gold is influenced both by production costs and by the fluctuating demand for the product, which is an element of all of the factors we've just discussed.
While a popular investment, gold remains a complicated asset to price. Unlike other investments that depend on fundamental financial data, the price of gold has both a psychological component and some economic factors that are tied to the overall marketplace. To learn more about how to buy gold, download our report: The Essential Guide to Buying Gold & Silver.