Gold is an attractive investment choice for investors, and prices have been trending higher in the past several years. Whether the yellow metal will continue its upward trajectory remains to be seen.
A number of factors can drive the price of gold higher, such as increased demand and constrained supply. Other factors include interest rates, economic growth and political uncertainty.
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Supply and Demand
Gold is a good investment for a number of reasons, but its price is driven by demand. It can be an inflation hedge and a safe haven for investors during periods of turmoil.
The supply of precious metals (gold, silver, platinum and palladium) is replenished through mining production and recycling of scrap or obsolete material. New supplies fluctuate with time, reflecting the cost of production and reclamation values as well as the economic outlook.
The demand for gold comes from a variety of sources including jewelry, investment bars and coins, central bank reserves and manufacturing. Gold is a useful metal in a range of industries and its use is expected to grow.
Interest Rates
The price of gold can increase for a number of reasons. It can be due to increased demand for the metal, economic or political changes, or even a change in supply.
The interest rates at which gold is valued also affect its value. When interest rates rise, it usually causes money to flow out of gold and into other high-yielding investments such as bonds.
However, the price of gold can actually increase when interest rates drop. It is considered a safe haven investment, and investors often choose to hold it during times of uncertainty.
The price of gold can also rise as the economy improves and confidence increases. This is usually when consumers and companies borrow more money to expand their businesses.
Economic Growth
Gold is seen as a store of value, and it often increases in price during times when the economy is getting worse. This is because gold has positive price elasticity, meaning that as more people buy it, the price goes up in line with demand.
This is important because it means that the price of gold is not determined by monetary policy alone. The price is also affected by inflationary expectations and pessimism about the future of the economy.
In this regard, the real gold price moves in concert with long-term inflation expectation and the fraction of Michigan survey respondents expecting largely bad economic conditions over the next five years (the pessimistic expectations variable).
We find that these three variables explain more than half the variance of the average annual log level of the real gold price. The coefficients on innovations in the expected ten-year real interest rate and PTR themselves are large, and the coefficient on innovations in the pessimistic expectations variable is small.
Political Uncertainty
The price of gold has been on a bullish streak in recent years. It is commonly referred to as a safe haven asset, and has become increasingly popular among investors seeking stability during times of turmoil.
Political uncertainty is a major driver of volatility in financial markets. This is because the uncertainty associated with political decisions, such as the government’s stance on trade, can cause investors to hold back on making new purchases or investment plans.
For example, businesses may hesitate to make new investments in the United States because of concerns about the political climate. This is especially true in the face of rising geopolitical tensions such as the US-Russian nuclear standoff and the ongoing trade war between China and the United States.
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