What are the causes that the gold rate goes up and down? 1. personal and industrial demand, 2. war and national emergencies, 3. central banks and 4. Investors.
1. Personal and Industrial Demand
The main factor influencing the gold price is demand for jewellery, which consumes two thirds of the annual gold production. India is responsible for 27% to the demand. This country has a long history and tradition of gold jewellery.
Industrial demand is at 12% of gold demand. Gold is a favourite material in the industry as it has a high thermal conductivity and high resistance to corrosion. Demand for jewellery and industrial increases over the years as the population grows. A further boost to gold demand comes from the emerging markets, such as India, Brazil and China which become more industrial and its citizens wealthier. China is also reducing the limitations to own gold. This additionally drives up demand for gold.
2. War and National emergencies
Another factor influencing the gold rate are national emergencies and unable governments. Even though war reduces the need for gold, because people are less willing to invest, and they are probably more occupied with struggling to survive.
However, in extreme situations gold is a stable substitute to a national currency. See for example the hyperinflation in the 1920s in Germany, or Zimbabwe’s current hyperinflation. Another problem are dictators who limit the export of gold, nationalize gold mines or just make gold supplies disappear from the central bank.
Read the second part to learn how central banks and investors influence the gold rate.
Filed under: Fundamentals of Gold Investment