What Affects Gold Prices Today?

Jun 29, 2011
Asa Ghaffar

What's the Price of Gold? - Image by feanor747

Investing in gold is considered to be a safe haven in times of economic and political uncertainty or war. Find out what influences today's cost of gold.

In July 2001, the price of gold per ounce was just $264.80. However, by June 2011, the cost of an ounce of gold had risen to a staggering $1,565.90. That's an increase of 491.4%. What led to this rise? Quite simply, economic instability and financial uncertainty. The 10-year chart reveals a sharp price increase when it became clear that the global economy was in trouble.

What Affects Gold Prices?

The movement in the price of gold is difficult to predict. However, it's largely influenced by the following:

World governments use of gold bullion to support their currencies.
Industrial demand from manufacturers as a raw material for their products.
Investors use gold bullion as a hedge against financial uncertainty.

Financial Uncertainty

Private investors, companies and governments invest in gold as a hedge against economic uncertainty. When speculative investments are falling, gold prices provide stability. It's expensive to mine so the world supply of gold will always be controlled. However, like all investments, timing is everything.

In an article on the 24 March, 2010 in the Daily Telegraph called "Explain why you sold Britain's gold", Mike Warburton of Grant Thornton stated that: "Between 1999 and 2002, Mr Brown ordered the sale of almost 400 tons of the gold reserves when the price was at a 20-year low. Since then, the price has more than quadrupled, meaning the decision cost taxpayers an estimated £7 billion."

Currency Support

The relative scarcity of gold ensures that it holds its value, so different world governments use it as a source of currency support. The United States are the world's largest gold investor. They have 8,139 tonnes of gold securely stored in its vaults, more than both Germany and France combined.

Until the mid-1990's, gold's primary purpose was to act as a hedge against a currency devaluation and commodity price changes. However, gold is now seen as more of a safe haven for investors who are trying to avoid over-exposure to the more volatile markets.

Industrial Demand

Gold is needed for the manufacture of jewellery, dental fillings, glass making, aerospace and electrical wiring. Industrial demand tends to experience a slight fall during an economic downturn due to lower output figures. This is because its primary use is in the manufacture of electronic equipment and consumers spend less on these sort of products when economic growth is flat or declining.