Gold is a traditional asset, parents usually use it to pass down wealth to subsequent generations, as it’s is also popular as a hedging asset class. What this means is that often, gold prices go up when interest rate goes down, a parameter that is directly proportional to the strength of the economy. So gold is a hedge against a falling economy. It serves the same purpose against inflation too. Here are the 5 key factors affects gold prices:

Demand and supply of gold

Jewelry accounted for approximately 44% of gold demand in the first half of 2022, according to the World Gold Council. India, China, and the United States are the largest consumers of gold for jewelry in terms of volume. Another 7.5% of demand is attributed to technology and industrial use, where the metal is used in the manufacturing of medical devices and precision electronics like GPS units.
Accordingly, gold prices can be affected by the basic theory of supply and demand. This means that as demand for consumer goods (like jewelry and electronics increases), the cost of gold can rise.

Gold Production

Major players in worldwide gold mining include China, South Africa, the United States, Australia, Russia, and Peru. The world’s gold production affects the price of gold, another example of supply meeting demand. Gold mine production was roughly 3,000 metric tons per year in 2020 and 2021, down from a peak of around 3,300 metric tons per year in 2018 and 2019.

Despite increases starting around 2010, gold mining production has not changed significantly since 2016. One reason is that the easy gold has already been mined. The fact that gold is more challenging to access raises additional problem. Miners are exposed to additional hazards, and the environmental impact is heightened. In short, it costs more to get less gold. These add to the costs of gold mine production, sometimes resulting in higher gold prices.

Value of the U.S. Dollar

The price of gold is generally inversely related to the value of the U.S. dollar because the metal is dollar-denominated. All else being equal, a stronger U.S. dollar tends to keep the price of gold lower and more controlled, while a weaker U.S. dollar is likely to drive the price of gold higher through increasing demand (As more gold can be purchased when the dollar is weaker).

As a result, gold is often seen as a hedge against inflation. Inflation is when prices rise, and by the same token, prices rise as the value of the dollar falls. As inflation ratchets up, so does the price of gold.

Central Banks Reserves

As central banks diversify their monetary reserves (away from the paper currencies they accumulate and into gold) the price of gold typically rises. Many of the world’s nations have reserves that are composed primarily of gold.

central banks have been buying the most gold since the United States abandoned the gold standard in 1971, with 2019 figures dipping just modestly from 2018’s 50-year record.

After a downtick in central bank gold purchases in 2020, the pace picked up again in 2021 and surpassed the 50-year record again in 2022. The top gold buyer in 2022 was the central bank of Türkiye, followed by Uzbekistan, India, and Qatar.

Economic Uncertainty

In uncertain economic times, investors tend to put their money in gold. As it happened during the coronavirus times when it started spreading in China and Europe and investors feared a global economic downturn.

Gold usually rises alongside investors’ uncertainty in the economy. It’s a “safe haven” for investors who want to hedge their bets against a falling dollar and instability in financial markets.

Many economists believe year 2023 could see ‘mini recessionary’ situations in many developed economies, which will create risk-off sentiment, increasing gold’s importance in the portfolio.

In fact, in the quarter-ended September 2022, emerging economy central banks added almost 400 tonnes gold in their portfolio, causing quite a stir, as investors and market observers want to know more about such large purchases at a time of global geopolitical uncertainty. We believe geopolitical tension and fear of slowdown in global economy may shift demand towards gold as safe haven in the coming year as well.