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Price of Gold – Why Does it Change

By on March 8, 2013

Price of Gold – Why Does it Change


Knowing where to invest hard-earned money is a question everyone asks themselves at one point in time. Different people choose different forms of investment such as bonds, stocks, real estate, silver, or gold. Many, however, go with the latter as it has lower risk of loss compared to the former options. If one is considering investing on the yellow metal whether to hopefully multiply monetary assets or simply to protect it from financial crises, it is imperative to understand how the price of gold works.

Naturally, the price of gold isn’t flat and is actually highly volatile. Although the past decade or so has suggested a generally upward trend for the average price of this material, gold financial charts would show just how different the gold price can be on an hour to hour basis. Like any other commodity, there are many factors that determine and affect the price of this metal including but not limited to supply and demand, currency fluctuation, bank failures, social and political crises, and even the people’s perception of this precious metal.

To start with, the price of gold per ounce is set twice a day via the London Gold Fixing. This is a phone meeting of select members of the London Gold Pool who set the “standard” price of the yellow metal for trading around the globe. From this spot price, further adjustments are made by gold traders throughout the day recorded in gold price charts. But what determines these adjustments?

The thing about gold is that unlike wheat, sugar, or other food items, gold does not spoil and thus the fluctuations in the gold price do not root from the common notion of supply and demand. Technically, the amount of gold tons can only ever go up because people don’t throw gold away and the gold that has been mined from eras ago are still aboveground together with newly mined ones. When experts quote that the supply is low, what they mean to say is that the gold available in the market for trading is little or insufficient to provide the demand.

Gold is meant to be a longtime investment and so what can affect the price of gold per ounce are sudden changes in the availability of gold in the market. This variation in the gold market supply may be caused by an individual, group or a bank’s decision to suddenly hoard or dispose a large enough sum of gold to disrupt the balance. When the supply is low, the price usually shoots up as this is an indication of either an economical crisis to come or a steady increase in the gold price in the future.

Currency failures also contribute a lot to the changing price of gold. When the world stopped using the gold standard and started to rely on fiat money, control over a country’s printing of bank notes has been minimized if not totally diminished. However, excessive cash notes of a country lead to a decline in the weight of their currency to another. This would result into people seeking out gold investments so as to protect their current money and try to retain its value before the currency decline.

This practice of investing in gold in times of financial uncertainty such as war, famine, depression or natural disasters increase the gold demand greatly. Paper money can easily lose its value during times of turmoil and what money one might use in feeding himself lunch today might not be enough to purchase a loaf of bread tomorrow. People buy gold to give more stability to their assets and when demand for gold is up, the price is sure to follow.

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