Paper notes have risen and fallen over centuries, but the value of gold has always been preserved. Although cultures traditionally revered gold for its elegance, investors are now buying gold to expand their assets, inflation hedges, and to guard against the devaluation of the currency. Gold is a worthy investment, but little is understood on how gold prices are calculated and what determines the gold price per ounce.
How Is Gold Priced?
Traders mainly use two pricing structures to calculate the potential investment value of gold.
- Gold Futures Price
Gold futures prices are the foundation of the LBMA (London Bullion Market Association) Gold Price. These arrangements are for the direct transfer of a fixed amount of gold at a specified future date. Various factors dictate a gold futures contract price: the gold spot price, the expected increases in supply and demand, the projected expense of shipping and handling physical gold, and the risk-free rate of return for the owner.
These trades are mainly electronic because physical gold is not supplied instantly after the transaction. It’s also risky because of the volatile nature of supply and demand variables.
- Gold Spot Price
The price of gold to be shipped directly after the sale is called the spot price. Averaging the capital value for all gold futures contracts traded for the next month will give you the gold spot price. Gold futures prices throughout the stable market are also much lower than the gold spot price. In periods of exceptional demand for the precious metal, the spot price may be lower than the futures price.
What Other Factors Determines Gold Price Per Ounce?
What affects gold prices apart from the LBMA pricing process? Three key external factors have a significant impact on the price of gold.
- Supply and Demand
The fundamental economic concept of supply and demand is a critical factor in all commodity prices. If the demand for gold is strong and stocks of precious metal are weak, the gold prices will increase. In the reverse situation of high supply and low demand, the prices would go down.
Because gold is limited, the supply will always be restricted. According to experts, the world hit the height of gold years ago, and production rates would only continue to decrease. Nevertheless, the demand for gold from consumers, central banks, and the medicine and tech industries remains strong.
- Market Conditions
If the market is robust, commodities besides gold perform well. Shares increase in value, pushing asset demand away from gold and other resources that do not generate revenue. Meanwhile, if the economy is declining, demand for shares and other financial assets will shrink. It leads to more money towards secure investments, including gold and cash.
- Depreciation of Currencies
Currency depreciation happens if a country’s currency drops in value compared to any foreign currency. Inflation and fiscal policy, including quantitative easing, are two factors that cause the depreciation of a currency. Inflation is a decline in the buying power of money.
Because gold continues to hold and increase its value, and the currency is vulnerable to substantial drops of purchasing power, shareholders are defending their investments with gold. Once a country’s currency becomes low, traders turn to gold, which increases its prices and the demand.
Understanding how the price of gold works and what influences the market could allow one to make investments in the precious metal wisely. Long-term traders can see the potential of buying gold and earning a profit on their stocks with the yellow metal. Regardless of how much prices change, gold will always hold value in portfolios.
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