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Gold is a Powerful Medium of Exchange...

Gold doesn’t have a utility in everyday life of human beings. A completely different set of factors and principles operate gold price. Following are some of the major factors which determine gold prices:

  • Inflation: The topmost factor affecting gold price is inflation. It is usually believed that gold retains its value and wealth. When the value of paper currency depreciates during inflation and as a consequence the purchasing power of people decreases, people want to shift to another form of money that retains its value. Thus, people start investing in gold. The Consumer Price Index (CPI) gives a good measure of the level of inflation in an economy. It is also known as the cost of living index and is tightly controlled by central governments in many countries. Gold price positively correlates with inflation, i.e., gold price rises in inflationary environment. If you need a little more knowledge about these things, then visit
  • Interest rates: Interest rates sky rocket when capital is scarce and at the same time the there is a high demand for capital. Under such scenarios, those who are willing to lend out money charge a large amount of interest. Gold prices have a negative correlation with interest rates and so it falls when interest rates are high.
  • World instability: Gold prices shoot up whenever there is some kind of major instability in the world like war, terrorist attack, natural disaster, etc. During such times, people prefer owning gold and as a consequence gold prices shoot up.
  • Other investment alternatives: Investment alternatives such as commodities, bonds, stock markets, etc. can discourage people from investing in gold. When stock markets are sky rocketing, many people may be tempted to invest in stock markets by selling off their investments in gold. Thus, gold prices may go down temporarily in the presence of more attractive investment alternatives.
  • Demand for gold: Demand for gold usually comes from three areas- jewellery, investment bullion and industrial demand. If the demand for gold in any of these three areas rises due to some reason, gold prices would rise due to natural demand and supply laws.
  •  Mining supply of gold: Recent studies have suggested that gold mining is becoming harder and more expensive. This would put an upward pressure on gold price and force it to rise because the demand for gold will increase as population increases and it would exceed new gold supply.
  • Central banks: There would be widespread inflation across the world if central banks enter a currency war. Another major factor affecting gold price is the amount of gold central banks keep as reserves.
  • Futures market: Future trading has turned gold into a speculative commodity. Traders can manipulate gold prices accounting to their wish for short term profits.