Gold prices have been surging recently worldwide, markets seem to be in turmoil. Recently, gold reached a yearly high of $1,249.90, it looks like it could keep on running up. Several factors are driving the price of gold today. Let’s take a look into what’s driving these factors.
Worldwide Market Demand
Basically, the price of gold is affected by two factors, the demand and the state of the market.
Its demand in the market is connected to the number of investors who need gold for their own use. The state of the market, on the other hand, reflects the volatility of the economy, the world market’s overall performance, the inflation rate, and the value of paper currency. With this, one can gauge the performance of gold in the current market. If you check the state of the world economy, you might get an idea why the gold prices have been rising.
Gold has always been a precious metal to retain wealth and viewed as a hard currency. Gold also serves other purposes as it is used as an industrial metal for medicine, computers and other electronics so it has a constant world-wide demand.
While gold is in demand all over the world, its production has not seen a considerable increase in recent years as the mining process is extremely tedious. Thus, the demand of gold has always been greater than its supply. It is elementary knowledge that when a product has more demand than its supply, it will naturally increase its price and reach equilibrium.
Negative Interest Rates
There seems to be a trend in banking across the world as they have implemented negative interest rates, wherein a depositor will be charged for depositing his or her money in a particular bank. The central banks of Europe and Japan have implemented such policies, and other countries will surely follow suit.
The theory behind the negative interest rates, is it will boost the economy by pumping more money into the market, instead of letting it pile up in banks. Negative interest rates are implemented to give banks incentives to lend the money in their reserves, instead of just sitting there. This is an arduous attempt to inflate the prices in the market.
With implementing negative rates, various banks are also compelled to print more currency to have extra liquidity. The urgency to implement negative rates is because the economy, despite a progressive increase, has not seen a sustainable rate of inflation throughout the world market. Thus, in theory banks think that if they carry out these methods, it will drive consumers to spend more money and boost their already weak economies.
How are Negative Interest Rates Beneficial to Gold?
The injection of currency into the market to promote spending has caused investors to flock to gold because it’s always been seen as a safe haven in times of uncertainty. The average guy on the street who has around 25,000 in a checking account wouldn’t be as affected as an investor with $1,000,000 in their account. These negative interest rates have sent investors running to gold because:
- Hedged Safety: The logic in negative interest rates is the government’s last-ditch effort to resuscitate a stagnant market, and an investor wants to be hedged against failing currencies. The smart investor on the street isn’t the only person jumping into gold. Banks are also backing up the truck to increase their gold holdings during the period of negative interest rates. Seems the banks don’t believe the hype of the negative interest rates will boost the economy, otherwise they would unload their gold reserves.
Gold will continue to grow in price as the demand for gold will be in a constant need throughout the ages. As the world economy continues to grow the need for gold’s industrial purpose will increase. And people will always seek shelter to preserve their wealth from some kind of underlying economic disaster.
This new trend with governments trying to stimulate their already weak economies with negative interest rates sounds good on paper, but will it have the positive outcome they are so desperately seeking? We don’t think so.
If you haven’t thought about hedging your wealth with gold, now might be a good time before gold prices really take off.