Gold is a very important financial product these days. What’s more, it’s being used to manufacture various gadgets, which definitely adds value to this material. As of the date of writing this article (5th of November), gold is worth around $1,681. When considering that 30 years ago, its price was below $400, you might have a logical question: “what drives the gold price?” It’s very important to answer this question if you want to trade gold. This is what we will try to cover in today’s review!
Reserves of Central Banks
Central banks of countries not only issue their domestic assets, but they also hold gold reserves. It’s interesting to learn that a lot of institutions compose their reserves mostly of gold. The diversification of the monetary reserves of a central bank is the reason. The bigger the level of diversification is, the higher the gold price might go.
According to the studies of financial experts, the buys of this precious metal among central financial institutions of nations greatly increased after the U.S. rejected the gold standard in 1971. As of the third quarter of 2022, the biggest amounts of gold (calculated in tonnes) are held by central banks of Western European countries, while Turkey remains the biggest buyer of gold. Over the course of a year, the Central Bank of the Republic of Türkiye added more than 90 tonnes.
The U.S.D Price
The price of this metal heavily depends on the USD value. If there are no other determining factors to change the gold price, the strong USD will keep the gold value below the traditional benchmark. On the contrary, the increasing gold price means that the dollar is weakening. Why is it so? In a nutshell, the decline of the USD value causes the growing demand for gold. This is why gold becomes more valuable when the global economic system gets volatile and faces inflation.
The Industrial Demand
In 2022, gold isn’t just an instrument that functions as an inflation hedge. Foremost, it’s a worthy metal that is used in different industries. Over 50% of the total gold demand is distributed to the jewelry sector. Statista reports that in 2021 the technology industry used over 330 tonnes of gold, which is less than 3 times lower than the total investment demand as of the same year. Consequently, we must consider the consumption of gold by different industries because they drive the demand and supply of this material.
Investment Demand
Gold is a financial product that is known for its enduring value. This is the reason why this metal becomes a popular investment option in the time of the crisis period. The metal is known to preserve its value even during the most uncertain period in the world’s economy when currency prices become volatile and many other financial assets get devalued.
The enduring nature of gold’s value drives its investment demand during uncertain times. World Gold Council reports that in 202 the investment demand for gold exceeded 1,000 tonnes. This is more than 26% of the total gold production.
Gold Production & Supply
The demand for products always depends on their supply. The same rule is applied to gold. As of November 2022, the biggest gold mining countries are China, Australia, Russian Federation, the USA, and Canada. This year, the global gold production amount is expected to increase by 2.7% and reach an amount of 4,791 tonnes. Consider that just 10 years ago the gold supply was almost 2,000 tones lower.
Conclusion
Now, you know all the key factors that make the gold price jump. In the end, we would like to conclude this review by providing you with 5 valuable tips on how to trade gold efficiently and boost your trading earnings.
1. Study how much gold central banks buy
When you know the importance of central bank gold reserves, you realize how they drive the value of gold. With the information about how much gold was bought by central banks, you can make predictions on how the price of this metal will change in the shortest perspective.
2. Stay tuned to geopolitical events
If the geopolitical situation is unstable, many currencies might get devalued. For example, Western nations imposed economic sanctions against Russia and cut off its gold supplies because of its unprovoked invasion of Ukraine, which gave another boost to the gold price. If you follow the geopolitical situation, you can forecast the economic instability and choose the best time to invest in gold.
3. Target previous highs and lows
The XAU/USD pair tends to follow trends and trade within a specific range. That provides you with an excellent opportunity to take advantage of buy and sell signals within the previous lows and highs.
4. Trade during New York hours
There are no time limitations on gold trades. However, it’s better to do this when the market liquidity is the best. This occurs during New York trading hours
5. Study how the commercial needs impact the gold supply
Last but not least, we recommend you follow industries that need gold in their manufacture. Primarily, these are the jewelry and electronic sectors. With this information, you will be able to predict when the demand for gold and its price will rise.
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