5 Most Important Factors that Impact Gold Prices

1. Changes in exchange rate. A weaker U.S. dollar exchange rate is usually encouraging the increase in world gold prices. This is because investors choose to sell their dollar and then buy the gold with the hope that gold can protect the value of their assets. For example, while the value of dollar exchange rate against other currencies continue to decline, the price of gold continue to rise.

USD Exchange Rate up = Gold Price Down

2. World political situation. Increase of gold price in the end of 2002 and early 2003 occurred as a result of the attack to Iraq by the U.S. command allies. Market participants shifted from money market investment and the stock market to gold investment, causing the demand for gold jumped so sharply.

US participation in any WAR = Gold Price UP

3. Supply and demand. An example of this 'supply and demand of gold' is like the event occured in mid-1980. At that time, forward sales by mining companies are always blamed for the rise of gold price. Although in business term, the mining company's actual behavior is reasonable. By making forward sales when gold rose, they could secure the mine output price at a fairly attractive price. Another example, the case in mid-1998 in which the gold price continued to decline. At that time, Central Banks in Europe Union said that they would reduce their gold reserves regarding the implementation plan of the Euro currency. Because of it, the price of gold has been plunged immediately around 290 dollars per troy ounce.

Bank Gold Reserve Ratio Down = Gold Price Down

4. The global economic situation. Approximately 80 percent of the total supply of gold has been used by jewelry industry. Jewelry consumption is a major influence on the demand side. As economic conditions improved, the need for gold tend to rise. However, the most sensitive industry to be influenced deeply is jewelry industry.

Recession had influenced the jewelry demand in the year 1982-1983, because at the same time, the gold price also rose. In the recession of the early 90, The level of jewelry demand was falling too, but at this time the price of gold also fall down simultaneously.

As described above, economic situation may lead to high inflation. So, the benefit of using the gold as a hedging tool against inflation has been felt by investors for a long time. With gold, investors got a perfect protection against the decline in purchasing power. On the years 1978-1980 the price was booming. While inflation in the U.S. rose from 4 percent to 14 percent, the gold rose three-fold.

High Inflation = Low Purchase power = Gold Up as investor see this safe haven

5. Interest rate. When interest rate rise, peoples tend to keep money on deposit better than gold which does not earn interest (non interest-bearing). This will cause pressure on the price of gold. Conversely, when interest rate fall down, the price of gold will likely rise. In theory, if the short-term interest rate rise, your gold fell. In Indonesia, this theory does not always work. In 1998, as Rupiah fell sharply against the U.S. dollar currency, the government raised interest rate significantly for the hope to put a halt to rising U.S. dollar exchange rate. As a result, despite from rising interest rate, gold price also rose.

High Interest Rate= Gold Price Down