Open up an investment-related newspaper, magazine, or website and you will likely read about the price of gold. This precious metal is a hot topic regardless of the time of year. Yet most people are not exactly sure as to how the price of gold is actually determined. Sure, it is a rare metal that exists in finite portions. The odds of humanity discovering an astonishing amount of additional gold are quite low. However, the price of this precious metal still fluctuates for a variety of reasons.
Putting a Price on Gold: Demand Matters a Great Deal
As noted above, it is highly unlikely that a gargantuan amount of gold will be discovered on our planet. While the supply of gold is somewhat static, the demand for this precious metal is incredibly dynamic. The fluctuation in demand is largely responsible for gold’s price alterations. When demand increases, the price of gold goes up. When there is less demand, the price of this precious metal decreases. Yet there are also other variables in play.
Global Institutions Impact the Price of Gold
Aside from supply and demand, the price of gold is partially determined by the actions of those who head central banks. The world’s largest central banks hold more gold than other institutions. Central bankers’ decisions regarding this precious metal are often responsible for pushing its price higher and lower. If a central bank deems it prudent to purchase a large amount of additional gold reserves, the price of gold will undoubtedly increase in a short period of time.
How Much Gold is Really out There?
No one exactly knows how much gold exists. Sure, the odds are quite low that enough gold will be discovered to drive the price of this precious metal down significantly from its current value. However, gold experts are adamant that there is more undiscovered gold than discovered gold at the current moment. Part of gold’s appeal is the fact that it does not go bad. It holds its value across posterity, making it quite desirable, especially when currency values drop.
The value of gold is also determined by geopolitical events. If a crisis breaks out in an especially important part of the world, investors are inclined to scoop up gold and therefore, drive its price upward. Any sort of social unrest or political strife also has the potential to spike the value of gold. Uncertainty pushes people toward gold as this precious metal has genuine value. It can be used for a myriad of purposes ranging from medical devices to consumer products, space shuttles, and beyond. If national economies, political landscapes, and societies are generally uneventful, investors tend to gravitate more toward riskier investments that might not have as much intrinsic value as precious metals.
Attempting to Predict the Price of Gold Requires Extensive Research
It is clear that no single factor determines the price of gold. Rather, gold’s value results from a variety of unique factors. If one were to attempt to predict the price of gold at a certain moment in time, he would have to analyse each of the variables outlined above. He would also have to analyse currency fluctuations across the entire globe. Even the amount of gold bought and sold on the London Metals Exchange, the Commodity Exchange, and the NY Mercantile Exchange in the preceding days plays a part in its future value. Add in breaking news events pertaining to the precious metals industries and it is easy to see why pinpointing the price of gold in the ensuing days, weeks, and months is quite an arduous task.
The factors described above are not the sole determinants of the price of gold. To completely overlook gold fixing would be a mistake. The “gold fixing price” is determined by the London Bullion Market Association (LBMA for short) at 10:30 AM and 3 PM every day. The five members of the LBMA perform London gold fixing at these hours through a teleconference. The group’s members are HSBC, Barclays Capital, Scotia-Mocatta, Societe Generale, and Deutsche Bank. Though the markets have multiple prices for gold such as gold spot price, bid price, and ask price, the standard for this precious metal’s true value is the price determined by these London power brokers.
LBMA members did not always meet up through a teleconference. Up until 2004, the group met in-person at a London office two times each day to fix gold’s price. If members were uneasy with proceedings, they placed a diminutive union flag on their desktops to halt activity and further discuss certain matters before settling on a price for the precious metal. Now that the group conducts gold fixing proceedings over the phone, all one has today is utter the word “flag” to invoke a discussion period. If no such objections occur, the LBMA chairman states that no flags have been raised and the price of gold is fixed.
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