What affects the price of gold: the main factors

Gold is a rare metal that has a high value not only for collectors and jewelry lovers, but also for investors. It occupies a unique and significant place, having historically established itself as one of the most reliable and valuable assets. For centuries, this noble metal has symbolized wealth and stability, and in today’s economy, it continues to play a key role in helping investors preserve capital and protect themselves from inflation, currency fluctuations and economic instability.

In this article, we will explore the importance of gold in an investment portfolio and examine the factors that influence its price. We will also discuss how gold can be used to diversify assets and how it interacts with other investment instruments in a changing global economic environment. Understanding these aspects will help you better understand why gold is often considered a “safe haven” in times of financial storms and how it can contribute to investment stability and growth.

Factors affecting the price of gold

The price of gold, like any financial instrument, depends on supply and demand. Gold is in demand in a variety of industries, from medicine and manufacturing to jewelry and investments. However, its supply is dwindling, as the main deposits are located in inaccessible layers of the earth. Let’s take a closer look at how these factors are reflected in gold quotations.

Demand

The demand for gold is growing year by year. This metal is actively used in industrial processes due to its unique properties – conductivity, corrosion resistance and chemical inertness. It is valued in electronics, dentistry, aerospace and many other fields.

Industrial demand for gold is relatively stable and varies depending on technological innovations and global economic growth, having a noticeable impact on its value only in periods of severe crises.

The jewelry sector has traditionally been the largest consumer of gold. Jewelry is valued for its softness, luster, beauty and durability. In many cultures, gold pieces serve not only as jewelry but also as a form of savings.

Investment demand has the greatest impact on the price of gold as large financial institutions, central banks, foundations and private investors invest in it. Investments in gold are made through bars, coins, metal deposits, core ETFs (exchange traded funds) and shares in gold mining companies. Demand for gold is driven by a variety of factors, including monetary policy of leading countries, changes in exchange rates, geopolitical tensions and global economic trends.

Supply

Modern gold mining is the main source of gold supply. It depends on geologic exploration, the availability of deposits, and innovation and efficiency in the mining industry. While modern technology allows the metal to be mined quickly and in an environmentally friendly manner, the amount of metal in easily accessible deposits is declining, which affects supply.

Existing stockpiles that can be melted down and put back into circulation are often utilized. This is gold held by central banks, as well as private reserves in the form of jewelry and bullion. Central banks of many countries use the metal as part of their foreign exchange reserves, purchases or sales of which can significantly affect the availability and price of the resource.

Other factors affecting the supply of gold:

  • Changes in the global economy.
  • The political situation in mining countries.
  • Technological innovations in mining.
  • Environmental regulations and legislation in the mining industry.

Understanding these factors is important for investors, analysts and market participants to evaluate the current and future gold price.

Additional factors affecting the gold price

The price of gold is shaped by a variety of factors. Attentive investors monitor their dynamics in order to react to changes in value in time. Let’s consider other key factors that can affect the price of gold.

Currency rates

Gold and the forex market are interconnected through gold reserves and monetary policy. Precious metals are traditionally traded in US dollars, so changes in the value of the USD directly affect the price of gold. A stronger USD reduces demand for gold, which pressures gold prices.

Inflation

Rising prices of goods and services are reflected in the price of gold. It is often seen as a hedge against inflation. During periods of reduced purchasing power, investors transfer funds into gold, supporting its price.

Geopolitical factors

Wars, terrorist attacks, international conflicts and sanctions lead to increased demand for gold as a safe haven. These events can also make it more difficult to mine and transport the metal, which contributes to higher prices.

Interest rates

Interest rates, especially in major economies, strongly influence precious metal prices. When interest rates are low, gold becomes a more attractive investment. When they rise, investors may abandon gold in favor of higher yielding assets.

Economic crises

In times of financial crises, investors turn to gold as a reliable means of capital preservation. At such times, demand for gold increases, driving up its price.

How gold strengthens an investment portfolio

Gold is often used to strengthen an investment portfolio for the following reasons:

  • Risk diversification: Gold has a low or negative correlation with other assets, which helps reduce the overall risk of the portfolio.
  • Inflation protection: During periods of rising general price levels and currency depreciation, gold retains its value.
  • Liquidity: Gold is one of the most liquid assets and can be easily sold at market price.

Conclusion

To successfully invest in gold, it is important to consider the many factors that influence its price – political, economic and stock exchange factors. Successful entry points can be determined by a fundamental assessment of the global situation. By including gold in their portfolios, investors can reduce their overall investment risk and improve long-term performance, especially in times of market volatility and economic instability.

If you are ready to start investing in gold, it can be done online with an international broker. Open a trading account and become an investor today.

What is a spread in the financial markets?

Any trader or investor comes to the financial markets with the purpose of making money. He or she seeks to buy assets cheaper and sell them more expensive, capitalizing on the price difference between the associated commodities and expected market movements.

In any case, the trader analyzes the price and its fluctuations between sellers and buyers, which in financial markets is called a spread.

Let’s take a look at what a currency spread is and what other types of price ranges exist on exchanges.

What is a spread

In the financial context, the concept of “spread” (from the word “spread” – divergence) can differ depending on the type of asset. In general terms, a spread is the difference between two price values for the same or similar instruments.

For example, it can be the range between:

  • The prices of sellers and buyers in the market at a given moment.
  • Prices for one asset: currency, stocks, futures at the current moment and after a certain period of time.
  • Prices for the same type of commodity, but of different brands, etc.

The most common variant in trading and investing is the difference between the bid and ask price (Bid – Ask). This is a commission for each transaction, which makes up the broker’s profit.

This is how, for example, the currency spread is formed. The exchange glass helps to better understand this concept. It is a special table formed by a market maker, where all limit orders from sellers and buyers of an asset are reflected. Bids are placed depending on their proximity to the current quote: the closer supply and demand are to the current price, the smaller the currency spread is. Since orders on active pairs are quickly satisfied and removed from the stack, the spread is constantly changing.

The spread for CFDs on shares and other securities is formed in a similar way. It can be several dollars, cents or even a fraction of a cent, so it is usually denoted in points. For example, if the price of NASDAQ 100 index is 11760.5/11761.3, the spread will be 8 cents or 8 points. This value is displayed in the market overview and in the glass.

It is believed that the smaller the spread, i.e. the closer the price of buyers and sellers, the more liquid the asset. This means that a trader is highly likely to be able to buy or sell it at the right time at an adequate price.

Types of spreads

Depending on the type of exchange-traded or OTC asset, the concept of “spread” can vary.

Currency spread

If we talk about the spread as a difference between bid and ask prices, as in the case of currency pairs or CFDs, it can be divided into fixed and floating spreads.

A fixed spread does not change regardless of market conditions: even when important news is released, when supply and demand shifts sharply. This level is set and maintained by the broker. It is usually higher than the standard floating spread in a calm market and lower in times of increased volatility. Today fixed spreads are rare, they have been replaced by market spreads.

A floating or market spread depends on supply and demand in the exchange stack and changes according to the preferences of traders. Usually for volatile assets it is more favorable than the fixed one and can be equal to zero at times. However, at the moments of important news release such a spread logically widens, so many brokers warn their clients about it.

Market spreads

There are intermarket and intramarket price ranges.

Intermarket spread reflects the difference in the cost of the selected asset on different exchanges, which is typical for securities. An intra-market spread is the difference between highly correlated or related instruments, for example, between stocks and their ADRs.

A special type of intra-market spread is the calendar spread, which exists in the derivatives market. It shows the difference in the prices of contracts for the same asset with different expiry dates.

Futures spread

This type of spread represents a trading strategy. Unlike a currency spread, a futures spread is a method in which a trader simultaneously buys and sells contracts on identical or similar commodities to profit from the divergence of their prices.

A futures spread occurs when:

  • Buying and selling a contract for the same asset with delivery in different months.
  • Buying and selling futures on different assets with similar quotation dynamics (correlation).
  • Buying and selling contracts for the same commodity of different quality.

Factors affecting the spread size

The size of the currency spread and similar spreads is influenced by various factors relating to a particular financial instrument. The main ones are:

  • Liquidity of currencies and securities: The higher the liquidity, the lower the spread. A large number of traders and market participants interested in transactions with this instrument leads to an increase in buy and sell orders and increases the chances of quickly concluding a deal at the right price.
  • Volume of trades and transactions: On stock exchanges, large transactions lead to a widening of the spread as many limit orders are executed at the same price.
  • Transaction amount: If an asset is purchased for a very small or very large amount, there are additional brokerage fees that increase the commission.
  • News and Publications: The main drivers of markets. Buy or sell decisions are often made based on them. After news releases, demand or supply increases sharply, causing the spread to widen. Before important news, trading activity drops, liquidity decreases and the spread widens.

How to work with the spread

It is impossible to artificially influence the stock or currency spread, as it depends on market conditions. But in order to reduce costs, you can:

  • Do not trade at times of low liquidity and the release of important news.
  • Open accounts with floating spread and choose active trading hours.
  • Choose popular currency pairs and securities.

Spread is less important for long-term strategies, but in this case you should take into account another parameter – swap (if it is applied).

Opening positions with limit orders can significantly reduce risks and additional costs, especially for large transactions or work with unpopular assets.