What causes the continuous rise in gold prices? This issue often becomes a focal point because gold is one of the stable assets frequently chosen by investors and is regarded as a safe-haven instrument. The phenomenon of rising gold prices certainly attracts not only investors but also the general public.
So, what actually causes the significant increase in gold prices? Are these factors temporary or do they impact the global economy as a whole? It is important to note that the rise in gold prices does not happen suddenly, but is triggered by various other more complex variables.
Understanding these changes can be crucial, especially if you want to make the right financial decisions or invest over the long or short term. Therefore, to find out what causes this price increase and its various impacts, let’s take a look at the following article!
Economic uncertainty in the global sector is one of the crucial factors that determines gold prices. When the stock market is volatile, currency values fluctuate, and crises occur, many investors tend to shift their instruments to gold, which is known as a stable and safer asset. This happened during the COVID-19 pandemic when gold prices reached record highs due to fears of a global recession and market uncertainties. Not only that, geopolitical conflicts and trade wars between countries also drive the prices of this instrument up and increase its demand. This is because gold is seen as a way to preserve value during crises.
Significant price increases in several sectors of the economy also affect gold prices. When the prices of goods or services rise, the value of paper money tends to decrease. For investors, switching to gold can help maintain purchasing power. Additionally, increases in energy and food prices continue to push gold demand. However, the relationship between inflation and gold is not always linear. Sometimes, if central banks raise interest rates aggressively to curb inflation, gold prices might drop because other instruments, like bonds, become more attractive.
Gold prices are inversely related to the value of the US dollar. This is because gold is traded in dollars; when the US currency weakens, gold becomes cheaper for investors using other currencies, thus increasing demand. For example, when the Indonesian rupiah strengthens against the dollar, Indonesians can buy more gold with the same amount of money. Furthermore, a weak dollar often occurs when the Fed (US Central Bank) lowers interest rates or engages in quantitative easing. However, if the dollar strengthens possibly due to interest rate hikes gold prices could be pressured down. Therefore, fluctuations in the US dollar remain an important indicator for gold movements.
Loose monetary policies, such as lower interest rates or quantitative easing (QE), also boost gold prices. When interest rates are low, instruments like deposits or bonds yield small returns, prompting investors to shift to gold, which does not yield interest but is more stable. This was evident during the pandemic when the Fed cut interest rates close to 0%, affecting the surge in gold prices. Not stopping there, QE where central banks print money to buy assets fuels inflation concerns and weakens the currency, making gold seen as a hedge. However, if the Fed tightens its policy, gold prices may experience a correction.
Besides macroeconomic factors, the physical demand for gold also influences its price. Countries like India and China have a strong culture of purchasing gold for jewelry, investment, or wedding traditions. Demand spikes during festivals like Diwali (India) or Lunar New Year (China) often drive prices up. Additionally, the technology industry requires gold for electronic components due to its conductive and anti-corrosive properties. On the other hand, several central banks especially in China, Russia, and Turkey are also actively increasing their gold reserves, reducing the supply in the global market. This combination of retail, industrial, and institutional demand pushes gold prices upward.
When central banks lower interest rates, bank deposits and bond investments yield little benefit. As a result, people are more inclined to buy gold. For instance, after the 2008 crisis, the Fed maintained low interest rates, and gold prices tripled over five years. Low-interest rates also reduce currency value, causing gold prices (in local currency) to rise.
When central banks print large amounts of new money, the money's value can decrease (inflation). Gold is often used as a protector of wealth against inflation. During the pandemic, the Fed printed a lot of new money, and gold prices rose nearly 40% in a year. However, gold price increases do not always happen immediately they sometimes take time.
Conversely, if interest rates rise, gold prices usually fall. People prefer interest-bearing investments over gold, which does not yield interest. In 2013, when the Fed signaled it would reduce stimulus, gold prices dropped 28% within a year. However, if the economy remains unstable despite rising interest rates, gold can still be a safe choice.
Kebijakan bank sentral juga mempengaruhi nilai tukar mata uang. Misalnya, Central bank policies also affect currency exchange rates. For example, when the European Central Bank implements loose policies, the Euro weakens against the US dollar. Since gold is traded in dollars, it becomes more expensive for Europeans, thereby increasing global demand. This can cause gold prices to fluctuate in the short term.
Gold prices do not only react to policies already in place, but also to anticipated policies. For instance, just the indication that the Fed might lower interest rates can cause gold prices to rise before the policy is actually implemented. Conversely, if central banks tighten more than expected, gold prices can suddenly drop.
The reasons for the continuous rise in gold prices are influenced by many factors, such as the dynamics of global monetary policy, ranging from interest rate changes, quantitative easing programs, to exchange rate fluctuations. Investors need to be alert to the signals from central bank policies, especially from the Fed, as its decisions often catalyze movements in the gold market. While gold remains a safe haven amid uncertainty, its response to monetary policy can change rapidly. By understanding this relationship, you can make more informed investment decisions.
