Key Factors That Affect Gold Bullion Prices

People have been investing in gold since ancient times. With options like investing in the stock market, Bitcoin, Blockchain, and in real estate, gold still reigns supreme as an investment option. Most people have shifted their focus to gold and are thinking about how to buy gold bullion as an investment. 

Did you know that the world’s central banks bought close to 272.9 tonnes of gold in 2020, per the World Gold Council data? While this is less than the 668 tonnes bought in 2019, the COVID pandemic is a major reason for the decline in demand from banks, which had to liquidate part of their reserves to maintain liquidity in the economy. 

Here are some key factors affecting gold bullion prices:

The Demand and Supply Factors

Gold is like any other commodity traded in the markets, with demand and supply playing a significant role in determining the prices. Unlike other commodities like oil, gold is not a consumable, and people invest in it for returns. 

The entire quantity of gold mined all these years is stored in some form in bank vaults, private vaults, and in homes as jewellery. With limited amounts of gold being mined each year, the rise in gold prices increases with the demand. 

Inflation Affects Gold Prices 

Whenever the inflation rate increases in any country, the currency value of the particular country decreases. With no other avenues left for investing safely, people turn to invest in gold. Suppose the inflation rate shows no signs of abating; even then, gold remains unaffected, despite the fluctuations in the currency.

Gold Prices and Interest Rates

Gold prices always move in an inverse ratio to interest rates. When interest rates increase, people don’t invest in gold as banks provide better returns. Conversely, when interest rates fall, people start looking for other avenues of investment, and as gold promises good returns, people invest in gold heavily. Hence, interest rates have a direct bearing on gold bullion prices. 

International Currency Fluctuations

Gold bullion is traded in the international markets, and the transactions are paid for in U.S. dollars. Other countries buying gold have to pay in USD, and the currency conversion for each transaction depends on the fluctuations in the U.S. dollar. The prices at which gold is imported into a country are affected by the international exchange rate of the U.S. dollar, which can either drive the prices up or push them down. 

The Economic Scenario

The economic scenario, particularly in the United States, drives gold prices. If there is a general depression, people lose jobs, and the wage data and manufacturing data show a downward trend. 

Such economic factors influence the policy decisions of the U.S. Federal Reserve, which in turn reflects in the fluctuation in gold bullion prices. A strong U.S. economy tends to push gold prices down, and when its economy shows signs of weakness, the gold prices automatically go up.  

The U.S. monetary policy also influences gold prices. The interest rates in the U.S. affect international gold bullion prices. Though gold may not produce regular returns like a bank deposit, people prefer to buy gold bullion when bank interest rates go down. 

Summing it Up

Investing in gold is considered a safe investment. However, gold prices are subject to fluctuation, and it is wiser to invest when prices go down and sell when there is an upward trend.