Factors Contributing to the Rise and Fall of Gold Price

U.S. Dollar Trend
Although the U.S. dollar is not as stable as gold, it has a much higher liquidity and is still considered the preferred currency while gold is the second preference of currency. Therefore, investors will usually opt to hold one and let go of the other. In simple terms, the U.S. dollar and gold price are moving in opposite trends; when the U.S. dollar rises, gold price will fall, and vice versa. Investors who acquire gold will let go of the U.S. dollar, and those who acquire the U.S. dollar will not hold onto gold. While gold is not a statutory currency, it will remain valuable and will not depreciate into scrap metal. When the U.S. currency is strong with good investment opportunities, investors will naturally go for the U.S. dollar and let go of gold. Conversely, when the U.S. dollar is weak, gold price will increase.

Factors behind the Supply of Gold
The price of gold is affected by supply and demand like all commodities. Supply of gold can be broadly divided into three categories, namely, gold mine production, circulation of gold among civilians, and supply from governments’ gold reserves.

Gold Mine Production:
Production activities such as gold exploration and smelting carried out by gold-producing countries are one of the sources adding directly to the world’s gold deposits, and newly-produced gold forms the initial gold supply. South Africa, Canada, the United States, China and Australia have relatively large amounts of gold deposits and output, of which China and South Africa has the highest output.

Circulation of Gold among Civilians:
Individuals in society who purchase gold will either pass down to generations or trade the gold if the prices are reasonable. Although the circulation of gold within the civilian society is influenced by the prices, the volume traded is limited and supply will only grow to a certain extent. Once the price reaches a certain level, supply will reach a peak and will not increase abruptly unless the price continues to climb further.

Governments’ Gold Reserves:
As gold has a history of being used as a form of currency, the authorities in different countries and in particular the central banks will usually keep a certain amount of gold as reserves. The governments’ gold reserves are made available to the market when countries implementing foreign exchange control sell off their gold reserves to obtain a fixed amount of foreign currency.