Price Determinants of Spot Gold

First of all, what do we mean by “spot gold”?  Actually, the “spot price of gold” might be a more accurate or descriptive way to convey the same meaning.  The spot price of gold is merely the cash price at which it can be bought or sold at a specified time and place.  Contrast this with the forward price of gold as outlined in a commodity futures contract.

Gold is used both as a medium of exchange (much like a currency) and as an input for industrial use.  Gold’s role as an exchange medium and storehouse of value has a much greater influence on price than the industrial use.

Another price determinant is the strength of the U.S. dollar against other currencies.  This is because the U.S. dollar plays a key role in the international financial system.  For example, if the dollar is strong against other currencies, it will likely be strong against the price of gold, making the gold price lower.  The reverse is also true: a weak dollar against other currencies results in a higher spot gold price.  Because of the relationship between gold and the U.S. dollar, factors that affect the dollar also affect gold.  Some of these factors include the price of crude oil, U.S. interest rates, and the U.S. balance of payments.

Political factors can play into the spot price of gold.  Political unrest and wars in other parts of the world can prop up the price of gold, often while the dollar weakens; however, the gold price can often rise in tandem with a strong dollar during times of uncertainty in the financial markets.

Another factor that affects the price of gold is its price against silver.  Traders watch an indicator called the gold/silver price ratio.  The ratio between gold and silver prices varies widely, but has averaged around 30 for most of the twentieth century.

A final factor that affects spot gold is the change in supply and demand caused by market participants.  Sovereign governments and international agencies, such as the International Monetary Fund, cause price changes when the buy or sell into the gold market.  Varying output of major gold mining companies can change the price of gold.  Also, investors accumulating or “dishoarding” gold can also affect the price.

The price of gold is affected by many factors.  Individuals must take these factors into account when evaluating gold as an investment.  Investors most often use gold coins or bullion as the vehicle for holding physical gold.


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