Gold News: 7 Factors to Understand Gold Prices

Understanding the true value of gold has always been a difficult task to achieve, as several factors wield influence on gold prices. Ben Bernanke, former chairman of America’s Federal Reserve, even told Congress in 2013 that “No one really understands gold prices,” and added afterwards that he didn’t get it either.

Here are 7 key factors that can help you understand gold prices better:

1- Inflation: Gold may perform especially well when inflation is high. For instance, over the past 45 years the average 12-month correlation between gold prices and the US consumer price index is 0.

2- Interest rates: The higher the interest rates, the less attractive it is to buy gold. Indeed, as owning gold doesn’t pay any interest rate, you loose the money of your investment when you could have earned interest on it. Yet, there is no constant relationship between gold prices and interest rates, they may move in opposite direction or rise and fall together.

3- Stock markets: Owning gold often helps having a balanced portfolio. Gold prices and the S&P 500 index show an average “12-month correlation over the past 45 years.

4- Geopolitics: Gold investors are now closely following geopolitical developments in Iraq and in Ukraine, as gold is considered a safe haven in time of uncertainty. For instance gold peaked in 1980 at $850 an ounce when the USSR invaded Afghanistan, around the same time as the hostage crisis at the US embassy in Tehran. More recently in 2011, during the Arab Spring and the Euro crisis, gold peaked at $1,920 an ounce.

5- The dollar: A weaker dollar often means higher gold prices: it is not the value of gold that is going up, but rather the value of the dollar that is going down. But over long periods of time the value of gold may also change in other currencies: gold has gained 273% for British investors against 255% for US ones over the past 10 years.

6- Oil prices: Gold and crude oil prices move in the same direction 60% of the time. But not necessarily at the same speed : over the past 10 years gold gains have increased by 235% against 140% for oil.

7- Asian demand: Asian demand tends to follow gold prices rather than setting them. For example, as gold prices fell by 30% in 2013 against all major currencies, including the yuan, the China Gold Association reported last July that the gold demand was down 19% and that demand for gold bars fell 62% since January.

I Know First’s predictive algorithm is one of the most reliable sources on future gold and commodities prices. Click here to see today’s forecast and some more gold news.

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