Anyone who has followed gold or has invested their money in this precious metal should be aware of the factors that drive the price of gold. Simply put, gold is moved by supply and demand and investor behavior. A lot of investors know that gold is a great hedge against inflation but that is not all; it seems simple enough. When paper currency loses its value then gold then it’s plausible that gold would gain in value especially since gold is available in known quantities, supply remains relatively constant. We also know that gold reacts to economic and political conditions this is why savvy investors put more stock in physical gold than in paper currency.
Inflation and gold
High inflation rates push gold higher, a drop in inflation results in the deflation of the gold price. This might not always be the. case when inflation rises the price of goods and services also rise always be the case. The important thing to keep in mind when considering inflation and its effect on gold you would have to look at the other factors as well. Inflation on its own is no guarantee of a rise in the price of gold. More scrutiny is put on inflations because it is used as a measure of economic growth. Central banks react to inflationary situations by increasing currency supply. However, expanding the supply of money dilutes the value of the currency in circulation. This makes it more expensive to buy gold or other metals that are regarded as precious.
Another factor is the movement of specific currencies like the U.S Dollar. A weakening U.S dollar has been pivotal in pushing gold prices higher. The biggest movers of the price of gold are Central Banks. As the world is left reeling because of its invasion of the Ukraine. Governments across the globe have issued strong words condemning Russia’s war effort. The markets have pretty reacted as expected.
Central Banks are the biggest movers of gold. When a country’s foreign exchange reserves are big and the economy is stable, a country’s central bank might sell some of the gold it has to focus on assets that generate returns like stocks and bonds.
Central banks manage their gold assets pretty much like a cartel so as not to cause big disruptions in the market. There’s an agreement that some countries have signed off on known as the “Washington Agreement.” This is a non-binding, gentlemen’s agreement that states the central banks will sell less than 400 tons of gold per annum. Unloading a lot of gold too fast can disrupt the market significantly.
Russia’s invasion of the Ukraine, has brought back the question of why the Russian Central Bank has been buying up so much gold since 2000 – was Russia bracing itself for what we are seeing now? Was Russia stashing gold in preparation for this? In the not-so-distant past, all Russia had to worry about were U.S sanctions. Now it is not just America using sanctions to bring the Russian political agenda to heel, the entire European Union has joined in imposing various restrictions and sanctions against Ukraine. Russia cannot turn to gold to bolster its economy as the Ruble goes tumbling down. The safe-haven status of gold will not work if there are no countries willing to buy Russian gold. Russia is sitting with a stockpile of gold worth $140 billion and sanctions that forbid the European Union, Britain, and the U.S from buying Russian gold.
Anyone who has followed gold or has invested their money in this precious metal should be aware of the factors that drive the price of gold. Simply put, gold is moved by supply and demand and investor behavior. A lot of investors know that gold is a great hedge against inflation but that is not all; it seems simple enough. When paper currency loses its value then gold then it’s plausible that gold would gain in value especially since gold is available in known quantities, supply remains relatively constant. We also know that gold reacts to economic and political conditions this is why savvy investors put more stock in physical gold than in paper currency.
Sanctions aren’t the only measures crippling the Russian gold market. The esteemed London Bullion Market association also suspended some Russian refineries from its accredited good delivery listing. This means that the country is will be restricted from buying or selling gold products in key global markets. All these restrictions may lead to gold being traded internally. With the ruble being as low as it is many will turn to gold just like Venezuela did.
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