Customers at New Zealand Mint ask what influences the price of gold.
Many factors lead to setting the gold price and although not exclusive, the main drivers that most commonly affect the metal price are summarised below.
Gold production: The mining of gold has been an industry in decline since the early 2000s. The gold that was of relative ease to extract has already been mined.
Now miners are forced to dig deeper to access quality gold reserves.
This has led to additional costs and technology, which expose miners to different hazards, increasing the duration of physical mining.
Additionally, the environment is severely disrupted, which in turn increases the overall cost of extraction.
The US Dollar and its value: A weaker US dollar exchange rate affects world gold prices by increasing the value of gold.
This is because investors choose to sell their dollar and then buy gold on the hope that gold can protect the value of their assets, whereas a stronger US dollar tends to keep the price of gold lower and more controlled, as investors have a tendency to invest and trade in dollars when the dollar is strong.
Supply and demand: How Gold is consumed has a direct reflection on its price. During 2010, about 54% of gold demand was utilised by the jewellery market and 12% by industrial demand.
Therefore, the price of gold corresponds to the rise or fall in demand.
Interest rates: When the rate of interest rises, investors tend to transfer money into funds on deposit, rather than gold, which does not earn interest (gold is non- interest-bearing).
This causes pressure on the price of gold.
Conversely, when interest rates fall, the price of gold tends to rise on the back of investors swapping back to other investment options.
The global economic situation: Most central banks hold both paper and physical gold in reserve.
According to the World Gold Council, many central banks are diversifying their monetary reserves away from paper currencies they have accumulated, into physical gold.
This influences a gain in the price of gold bullion.
Economic uncertainty
When there is economic uncertainty, a higher proportion of investors turn to investing in gold due to its historical enduring value.
A feeling that gold is a safer investment against bonds, equities and real estate in uncertain times is a common trend.
Gold is often used as a currency devaluation, inflation or deflation hedge. This turn by investors to bullion investment transcends to influencing the gold price.
For any other information on the price of bullion, please contact New Zealand Mint on 0800NZMINT (0800-696468). We will be happy to discuss any questions that you may have about investing in Gold and Silver.
Hayden is the Chief Operating Officer and Head of Bullion at the New Zealand Mint Limited, Sponsor of the ‘Business Excellence in Restaurant Trade’ category of the Indian Newslink Indian Business Awards 2012.
