What are the factors that affect the movement of gold prices? How do you invest?

What are the factors that affect the movement of gold prices? How do you invest?

Gold is not only a rare metal, but it can also be used as a hedge and a store of value against market uncertainty and high inflation levels. Indeed, it has played these important roles throughout history, making it a very unique metal. Long used as a store of value by various nations, gold tends to be more popular with investors in times of economic and political turmoil and during periods of economic downturn and financial crises.

Most of the changes in price are due to the effect of the supply and demand relationship on gold itself, so as an investor who has his own investment principles, you should understand as much as possible the factors that affect its supply and predict the direction of its prices to make a reasonable gold investment profit.

(1) The direction of the dollar

Although the dollar is not as stable as gold, it is more liquid than it, so the dollar is the first type of money and gold is the second.
The US dollar is negatively related to gold as a safe haven currency. When the supply of dollars increases, its purchasing power decreases, which in turn leads to a decrease in the value of the dollar and a rise in the price of gold. When the supply of dollars decreases, the purchasing power increases, which leads to a rise in its price and a decrease in the price of gold.
The reason is that the rise and fall of the dollar is determined by the monetary policy applied by the Federal Reserve, when the economy is overheated, the Fed tends to raise interest rates to calm the economy, and raising interest rates means less circulation of the dollar in the market and therefore the dollar rises, on the contrary, when the economy faces In a recession, the Fed will cut interest rates or quantitative easing to release liquidity in the market, which in turn causes the dollar to fall in value.

(2) Periods of war and political turmoil

In times of war and political turmoil economic development will be restricted to a large extent, thus any local currency is subject to depreciation due to inflation, at this time the importance of investing in gold is fully shown as it has recognized hedging properties and is an internationally recognized medium of exchange, people will target gold At such times, the rush to buy it will inevitably lead to a higher price.
But there are other common limitations, for example: between 1989 and 1992 there were many scattered political upheavals and wars in the world but the price of gold did not rise because of that, the reason is that at that time everyone had dollars and gave up gold, so you can't Investors automatically apply war factors to predict the price of gold but also take into account other factors such as the US dollar.

(3) global financial crises

When the financial systems of major western countries such as the United States are unstable, global capital will be invested in gold and the demand for its purchase will increase and thus its price will rise, at this time gold plays the role of a safe haven for money, but when the financial system is stable, investor confidence in gold will decrease Significantly, the price will drop.

(4) Inflation

We know that the purchasing power of a country's currency is determined based on the price index, when a country's prices are stable, the purchasing power of its currency is more stable. However, if price indices remain stable, the value of cash will not decrease and there will be interest income, and it will inevitably become the first choice for investors.

Conversely, if the inflation is severe then the holding of cash will not be guaranteed at all and the charging of interest will not keep pace with the rise in prices, people will buy gold because the theoretical price of gold will rise with inflation at this time, and the higher the inflation in the major western countries the greater the demand for gold As a store of value its prices have gone up.

(5) The relationship between supply and demand for gold

The price of gold depends on the level of supply and demand, if the production of gold increases significantly its price will be affected and decline, but if production stops increasing for reasons such as a prolonged strike by miners its price will rise, as demand will exceed supply.
In addition, the application of new gold mining technology and the discovery of new mines has increased the supply of the yellow metal which will certainly lead to a decrease in its price.
How to invest in gold?

Buy physical gold

Buying physical gold is the direct way for investors to get gold, physical gold comes in different forms like bullion or coins, its price is determined by the purity and quality of the gold, and investors can buy it from precious metal dealers and jewelry stores.

 

It should be noted that there are many costs involved in purchasing physical gold, including storage and insurance costs, as well as transaction fees associated with buying and selling gold, so investors should do a thorough understanding before purchasing it.

Gold ETFs

Similar to buying and selling stocks, gold ETFs are a very popular form of investment, gold ETFs consist of gold-backed assets with the aim of diversifying their investment portfolios.
These funds hold a small amount of gold-related assets and do not actually own commodities, and they provide investors with a diversified and low-cost option if they do not want to incur the huge costs associated with investing in physical gold. Gold has relatively low investment thresholds and is suitable for small and medium investors to invest.
Investing in gold stocks

Investing in stocks of gold mining companies is also an effective way to profit from investing in the yellow metal with less risk than investing in its derivatives. Gold-related stock prices are affected by market fluctuations and global gold prices.

Buying and selling gold shares is not only about paying attention to the company’s performance, but also about knowing where the prices are heading, for example: Barrick Gold stock, since the outbreak of the Covid-19 epidemic in 2020, the price of gold has gradually increased and the share price has risen by about 100% in time Ma, Warren Buffett added the stock to his portfolio due to economic uncertainty.

Investing in gold derivatives

1- Gold futures: an important tool against stronger inflation expectations in the future. A forward contract is a legally binding agreement that specifies the quantity, quality, timing and location of delivery. Gold futures are an investment method in which you can use leverage, so they come with risks. High but the return on this investment is also relatively high.
2- Gold Contracts for Difference (CFDs): CFDs refer to investors who do not need to buy physical financial assets but profit by anticipating the direction of the price of the assets. If the market moves according to your expectations you will benefit from it and if it moves against your expectation you will lose money, in addition to However, CFDs are also a leveraged trading product, investors can use lower transaction costs to get trades of greater value, so this investment method can increase potential returns for investors as well as bring in greater investment risk