How is the price of gold determined?

The precious metals market is a highly dynamic one, with most of its activity being spurred by gold prices. The price of the yellow metal is propelled by demand and supply, but there are several other factors that influence its day-to-day value. These include its viability as a long-term investment, which makes it a global currency in the truest sense of the word.

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Gold prices have skyrocketed over the decades in comparison to other national currencies. What drives this momentum, and why?

Gold and global currencies
The gold market is largely influenced by the trade of both physical and ‘contract’ gold, as well as the value of the U.S. dollar. The need to buy gold in any form is inversely proportional to the might of the American dollar: the stronger the U.S. dollar, the lower the price of gold, and vice versa.

However, any change in the buying and selling patterns of gold is owing to currency fluctuation worldwide and is not just limited to the U.S. dollar.

Gold and central reserves

Central reserves the world over hold the highest concentration of gold bullion. As a result, gold prices are also highly dependent on the policies of, and the reserves in such institutions. If a central bank sells off a certain percent of its gold reserve, the price of the metal may fall. On the opposite side of the coin, however, its value may increase if banks fail to provide adequate investment returns to customers.

Other factors

Global crises of a political or economic nature also have a significant impact on gold prices. National currencies can take a hit during times of uncertainty, and this is when the demand for gold rises since it is then viewed as a ‘safe investment’.

Conclusion

The above mentioned points present a very brief overview on what drives global gold prices. The standard accepted benchmark for determining the value of the metal is the London Gold Market Fixing, which comprises of five firms that buy and sell gold bullion. These firms are:
- Barclays Capital
- Deutsche Bank
- Scotiabank
- HSBC
- Societe Generale