5 Factors to Consider While Investing in Gold

Posted on 29th August 2017
5 Factors to Consider While Investing in Gold

Online gold trading has gained immense popularity during recent years to earn quick profits as it is considered to be a safe haven trade which does not depreciate in value even during economic crisis or inflation. Some consider the gold market to be a difficult one to trade in as it does not have much movement like other markets and there are a host of factors to bear in mind before trading in gold. Let's now discuss five key factors that have a bearing on gold prices.

1. Value of the US Dollar:

The US dollar is one of the world's most widely used reserve currencies that is used by various nations for international trades. The US dollar and gold share an inversely proportional relationship. When the dollar is at a high the value of gold declines and vice versa. However, gold investors may also perceive a strong dollar as a buying opportunity which could provide some support.

2. Inflationary pressures:

One of the most plausible reasons for holding gold is as a hedge against inflation and degenerating prices. Currency values tend to fluctuate corresponding to market movements but the value of gold remains steady over the long-term. People invest in gold when they feel that the value of their paper currency falls. Thus the yellow metal is looked upon as being averse to risks and less likely to be affected by price instability.

3. Central Bank policies:

Various countries have different central banks. For instance, in the US it is the Federal Reserve. Likewise, there are The Bank of Japan and Swiss National Bank for Japan and Switzerland respectively. Investing in gold gives investors a sense of security in the face of central bank deficits, failures or erratic policies. The worth of gold immediately shoots up with a spike in demand.

4. Interest rates:

Interest rates are not applicable to gold like savings and bonds but gold prices influence the increase or decline in interest rates. If the interest rate rises then the value of gold lessens and people tend to sell gold. On the contrary if interest rates decline people flock to invest in the yellow metal.

5. Supply and demand:

Supply vs demand is a key determinant of gold prices. Gold is a finite resource and when global conditions are favourable the demand increases leading to a rise in prices.

Besides the above factors gold rates are also impacted by production expenses, demand for gold in jewellery and industrial purposes, government reserves, geopolitics etc. Due to its intrinsic value and global demand anytime is a good time to invest in gold. You just need to be aware of the ABCs before putting your money into this precious metal.

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