Four Little Known Factors Driving the Price of Gold

Gold investing is arguably the most popular facet of the commodity world. From the people who buy physical bullion and bury it in a secure location to the day traders who utilize futures and products like GLD to make speculative bets on the metal’s movement. But there are a number of price drivers behind this yellow metal that investors may be unaware of. Below, we outline four little known factors playing into the price of gold in an effort to give investors a leg up on this commodity [see also Three Reasons Why Gold Is Overvalued].

  1. Quantitative Easing: For the time being, this is possibly one of the biggest drivers of this precious metal. The multiple QE programs from Ben Bernanke and company have been pushing and pulling on the price of gold for several years now. When the Fed prints more money, investors tend to flock to gold as the dollar loses its luster. Speculation surrounding a new QE program will always create an uproar among the gold investment community as investors do their best to stay one step ahead of the Fed. Currently, investors are waiting on QE 3 as it could help send gold back up to its 2011 highs.
  2. Investment Demand: From one perspective, demand for gold as an investment vehicle is a self-fulfilling prophecy. Because gold can be stored at a relatively low cost and held indefinitely, stronger investor interest in gold leads to higher prices for the metal. Assets in gold ETFs have skyrocketed in recent years, and the increased availability of these products has likely contributed to the rally in gold prices. To the extent that investment demand accelerates, upward pressure on gold prices could remain [see also Schiff: Draghi’s Commentary Means Gold Will Retest 2011 Highs].
  3. Reserve Demands: Governments and central banks are major buyers of gold, and the behavior of these institutions can have a major impact on the price of the yellow metal. China in particular could have a major impact on global gold prices, since precious metals account for only a minor portion of foreign exchange reserves.
  4. New Discoveries: As with any metal, the supply of gold can have a significant impact on prices. The pace of new gold discoveries has slowed considerably in recent years, though there are still a number of firms globally engaged in searching for new deposits of the precious metal. To the extent that any major discoveries are made, prices could decline. If discoveries of the metal slow even further, upward pressure on prices could materialize [see also Why Jim Rogers Thinks Gold Will Drop 20%].

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Disclosure: No positions at time of writing.

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