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Home›Finance›The Drivers of the Price of Gold

The Drivers of the Price of Gold

By David Cury
May 16, 2019
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Gold does not generate cash so it is impossible to value. Although it may seem like it, but the price of gold does not change randomly. The most powerful factor in the precious metal sector is sentiment. However, this isn’t the only driver, there are other factors at work. These are real interest rates, the strength or weakness of the U.S Dollar and risk aversion. These are things gold buyers Melbourne analyse as when gold is up more customers are lining up to offload gold jewellery, bullion and other gold items.

U.S. Dollar

Gold is quoted in U.S dollars. So, when the U.S dollar is weak, the price of gold goes up. When the greenback strengthens, the price of gold declines. Gold does not behave like other commodities, instead it behaves like currency. For instance, when investors sell the U.S dollar, other currencies like the euro and the Japanese Yen depreciate along with gold. This is why there is often a positive correlation between the price of gold and the value of these other two currencies.

 However, gold is still not a currency. When you look at it, gold is a bet against the U.S dollar and this is one of the major reasons why the U.S abandoned the gold standard in the 70s. However. People still associate gold with money. People are quick to run to it during tough and uncertain times.

Risk Aversion

Gold is used as a hedge against financial and monetary systems. Gold is a safe haven because it is largely uncorrelated with market stress like other commodities.  This explains why gold is seen as an insurance against uncertain economies. When things in the economy and in geopolitics are uncertain investors become too risk averse. They will begin to shift funds into safe-havens assets like gold. When things go the other way around e.g. the economy strengthens and confidence in the dollar is restored, gold begins to struggle.

Statistically, the correlation between credit spreads and the price of gold since 1997 has been 0.17. This may seem small but one has to remember you cannot really quantify risk aversion so credit spreads aren’t really an accurate approximation.

Conclusion

In the end, psychological perceptions have a higher impact on gold’s value. These perceptions or market sentiments depend on a number of interrelated variables. If you are an ordinary gold investor with a couple of gold bars or gold coins or you just have a lot of gold jewellery, the market can be a bit of a minefield to navigate. No one expects you to be an economist. You can study gold charts and probably find trends to help you work out the right time to sell. That is a tedious and time consuming exercise. The best thing you can do is to approach gold buyers Melbourne who have had first-hand experience with gold and its price. They can give you valuable advice about selling your gold.

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