Key Takeaways Investors have long been in love with gold, and its price has increased substantially over the past 50 years. Like most commodities, supply and demand are incredibly important, but gold also retains additional value. The price of gold is driven by a combination of supply, demand and investor behavior. That seems simple enough, but the way those factors work together is sometimes contradictory.
For example, many investors think of gold as a hedge against inflation. This has some common-sense plausibility, since paper money loses value as more is printed, while the supply of gold is relatively constant. Turns out gold mining doesn't add much to supply from one year to the next. So what is the real driver of gold prices? Of all the metals on Earth, gold shines the brightest when it comes to maintaining its value and being a vehicle for building and preserving wealth.
In fact, the price of gold has risen more than 400 percent compared to 20 years ago. These are publicly traded gold miners and suppliers, and ETFs have a positive correlation with the price of gold. However, whether gold is the right investment for you depends on your risk tolerance, market outlook, and whether you expect it to rebound or continue to fall, among other factors. Gold is a commodity that is not linked to anything else; in small doses, it is a good element of diversification for a portfolio.
When the economy weakens, gold prices tend to rise, as investors flock to the base of all safe haven assets. Speaking of portfolios, Hug said that a good question for investors is what is the reason for buying gold. The value of gold is much less volatile, making it more of a store of value, while BitcoinBTC acts more like a technology stock. Central banks have tried to manage their gold sales in a similar way to a cartel, to avoid disrupting the market too much.
At a time when foreign exchange reserves are large and the economy is moving at a good pace, the central bank will want to reduce the amount of gold it holds. Some investors may choose to maintain some exposure to gold in their portfolio to diversify, as a protection against the fall in stocks and bonds. Rate hikes are generally negative for gold because when rates are higher, interest-bearing investment products are more profitable than the precious metal. Now that you understand that gold is a store of value, you may be wondering how the price of gold reacts to various economic conditions.
The outlook for the price of gold will probably depend on how geopolitical tensions develop and how monetary tightening affects the world economy, among other factors. This is because gold is a dead asset, unlike bonds or even money in a deposit account, which does not generate returns. The World Gold Council, the market development organization for the gold industry, recently opined that the commodity will face two key obstacles. Erb, from the National Office of Economic Research, and Campbell Harvey, a professor at Duke University's Fuqua School of Business, have studied the price of gold in relation to several factors.