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Back to March 2019

Historically, gold has been sought-after for many reasons, not just for investment purposes but also for manufacturing, jewellery and as a standard of value that is used all over the world. We see the price fluctuate constantly, but what actually drives the price of gold? Does gold still have relevance in a modern, ever-changing world?

What Drives the Gold Price? 

Armed with the knowledge of why and how the price of gold fluctuates means an investor is better equipped, and there are many factors that drive the price of gold to move.

Inflation is regarded as a major factor, as gold is often seen as an attractive investment when people believe the value of their fiat money could decline. This in turn increases demand and drives up gold.

Currency devaluation is also a major influence. When the future of a currency seems uncertain, investors turn to gold again as their safe-haven, and the price goes up. Alternatively, a strong currency usually means a low gold price. Similarly, increases and decreases in interest rates also significantly affect the price, as gold moves in the opposite direction to interest rates. An increase in rates means investors are more likely to sell their gold to free up funds for other investments and so the gold price falls, whereas a decrease means gold usually goes up.

Keep an eye on the stock markets! During uncertain times, when returns on stocks fall, gold becomes interesting again, and history shows us the price almost always goes up. Also, watch the news! Global politics have always had an impact on the price. Political chaos, lack of confidence in governments and fear of bank failures mean that people turn to our favourite precious metal as a safe-haven, and prices rise.

Why Gold?

Historically, gold has always been seen as a treasure. An always recognisable asset you can see, touch, and hold in your hand, gold offers familiarity. For many, it brings a feeling of safety - a source of money that will always have value, no matter what. Gold is scarce, and supply has changed little over time, yet in contrast, paper money can be printed in unlimited quantities.

Also, as we’ve seen above, gold is uncorrelated with other assets and doesn’t rise when they do. Whatever the political or financial climate, gold has never gone to zero - gold is seen as the ultimate form of money, proving itself time and time again.

Is Gold Still Relevant?

Gold is definitely becoming more mainstream. Investment demand for the metal has grown significantly, partly driven by new ways to access the market. Even the global banks have been expanding their reserves recently, for the same reasons as we investors: as a means of safety.

For sure, gold will deviate and change, we will watch the price continue to move up and down - sometimes dramatically - but remember why we are in this: to protect our family’s wealth over a long period. The long-term is the final judge and jury. When all is said and done - gold will always hold value, even in a modern technological world. And that is the principle behind keeping some physical gold in your hand, isn’t it?

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This blog represents one person’s opinion only. Customers should conduct their own research and take advice before making an investment. We do not offer investment advice.


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