What factors increase the price of gold and who determines it? How does the global gold market work? Leopard Gold and Jewelry Gallery tells you what you need to know about gold pricing.
While the price of gold in each country is significant for local markets, the LBMA gold price is a key measure for the entire global gold market.
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The key factors affecting the price of gold are:
Supply and Demand
Investor sentiment
Inflation and movement of the US dollar
Because gold always rises when economic growth slows, the precious metal has historically been a good asset to balance out risky investments in your portfolio and protect against inflation that erodes the value of your savings It is considered.Gold price is one of the most important financial indicators in the world. It is frequently discussed in the economic news along with the main exchange rate, stock market indices, government bond yields and commodity prices in relation to gold. While market participants and precious metals investors are usually aware of the daily price of gold, what is less well known is how the price of gold is determined, how the gold market works, and what affects the price of gold.
Leopard Gold and Jewelry Gallery explains in this article:
How the gold market works
How to determine the price of gold
What factors affect the price of gold?
“Getting a deeper understanding of gold’s physical properties may help you better understand how gold prices work.”
How does the global gold market work?
Gold is traded globally 24 hours a day. Due to overlapping trading hours of gold markets around the world, live gold prices are available during the working week, from late Sunday night to Friday evening GMT.
There are basically two types of gold prices:
Current price of gold and future price of gold.
The spot price of gold describes a transaction that takes place immediately.
The future price of gold refers to a transaction that will take place later, usually in the next few months.
Gold prices worldwide are expressed in US dollars.
The global over-the-counter (OTC) market is the largest market in terms of trading volume and plays an important role in determining the price of gold.
What is the over-the-counter market?
The OTC market is characterized by investors trading directly with each other. This means that the two opposite parties agree on the price and are obliged to settle the transaction (exchange of cash for gold) with each other. According to the report of the World Gold Council, about 90% of the global gold trade is in the London OTC market or exchanges like New York COMEX or Shanghai Gold Exchange. Compared to the OTC market, exchanges are regulated platforms that centralize and facilitate transactions between gold investors.
How is the price of gold determined?
“London Gold Fix and London Bullion Market Association” are key names to remember when defining the concept of gold price fixing. The London Gold Fix was a method of determining the price of gold per troy ounce in US dollars. In 2015, it was replaced by the London Bullion Market Association, or LBMA, gold price. The price is still set in USD twice daily, at 10:30 and 15:00 GMT.
What is LBMA?
The LBMA was established in 1987 by the Bank of England, which was then the regulator of the gold bullion market. The LBMA establishes and monitors refining standards, creates trading documents, and promotes the evolution of good trading practices. Currently, the LBMA gold price is determined by 16 reputable market firms, including JP Morgan Chase (London branch), Goldman Sachs and Morgan Stanley.
What factors affect the price of gold?
Changes in the price of gold are caused by many factors, not one reason. Some of the factors affecting the price of gold are as follows:
Monetary policy and the movement of the Federal Reserve
The monetary policy defined by the Federal Reserve, the central bank of the United States, as the largest economy at the moment, usually has a great influence on the price of gold. Central banks play an important role in ensuring the economic and financial stability of a country. For example, when the U.S. economy is stagnant or sluggish, the Federal Reserve may use its power to lower interest rates to make borrowing more affordable for member banks and thus for consumers seeking to borrow from them. There is a general belief that the price of gold usually rises when interest rates fall and falls when rates rise. However, historical data shows that this is not always true.
Supply and Demand
As with any other good or service, increased demand for gold, coupled with limited or low supply from precious metal mines and refineries, drives up prices. Conversely, an oversupply of a good or service combined with stagnant or weak demand can drive down prices. Major players in gold mining around the world include: China, the United States, South Africa, Australia, Peru, and Russia. When it comes to investor demand, as more people start buying gold, the price rises in line with demand and falls when people start selling gold. Central banks are also big drivers of gold prices. The principle here is the same: when central banks diversify their monetary reserves and buy gold bullion, the price of the precious metal usually rises. According to the World Gold Council, central banks around the world have consistently increased their gold reserves in recent years. In 2021, central banks bought a total of 463 tons of gold, which was 82% more than in 2020.
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Inflation or the increase in the price of goods and services is the third factor that affects the price of gold. Gold has historically been used as a reserve commodity because of its rarity as a commodity and its long history as a reliable means of exchange and payment, It is considered valuable. So when there is economic uncertainty and high inflation, gold prices tend to rise.
U.S. dollar
Since gold is a dollar-denominated metal (meaning it is measured and expressed in US dollars), its price is usually inversely correlated to the value of the US dollar. As a result, a stronger dollar keeps the price of gold lower and more under control. While a weaker dollar is likely to increase gold prices by increasing demand, more gold can be bought when the dollar is weaker. As a result, gold is often seen as a hedge against inflation and paper currencies that have purchasing power. Unlike paper money, the price of gold does not change much from year to year. In fact, gold does not lose its value against inflation or become more expensive, it is the value of your paper money that is lost in inflation.
Summary
Gold has been a long-term investment asset favored by investors for a long time, and over the past 50 years, the price of gold has risen significantly. The LBMA gold price is the most important benchmark for the entire gold market. It determines the price of gold twice a day. Just like many commodities, the price of gold is highly dependent on supply and demand: mining production makes up the majority of the total supply of gold. Inflation, the US dollar, economic data and policies The economy of the US Federal Reserve is another important factor that increases the price of gold. Finally, central banks are one of the important sources of demand for the metal. The increase in the demand of the central bank for investment gold increases the price of gold.
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