Gold, one of today’s most popular commodities, is sought after for a wide range of uses, including jewelry making, investment opportunities, and the production of electronic and medical devices.

However, for the past two years, the COVID outbreak has shaken most countries’ economies and almost every industry, resulting in a global economic crisis. It also altered the way we do business and go about our daily lives. As a result, gold prices have been volatile in the last couple of years.

Undoubtedly, a wide range of macroeconomic factors influences the price of gold. Why does this affect the price of gold? Looking closely at some of these macroeconomic factors will help us understand how they affect gold’s value.

 

Economic Uncertainty

Investors frequently turn toward precious metals like gold to protect against currency devaluation or political instability. A safe haven in volatile markets is gold, which can rise even when other investments, like bonds, equities, and real estate, are expected to fall.

During the pandemic, many investors worldwide sought out physical gold in the form of bars and coins to address their financial concerns. The price of gold went up, as a result, climbing to $2,072.50 per ounce in August 2020 as governments and economies sought a resurgence.

 

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The Value of the U.S. Dollar

Gold prices fluctuate in relation to the U.S. dollar.

Many American businesses were forced to close due to the pandemic, and the government stepped in to assist them, driving up gold prices.

The Fed printed a lot of money for stimulus checks and coronavirus relief, and it weakened the U.S. dollar, causing gold prices to rise. Because the U.S. dollar competes with other currencies, it remains strong in the global market. A stronger dollar makes gold more expensive to foreign buyers and may cause its price to fall. If the value of the dollar continues to fall, gold may become more affordable to foreign investors, causing spot gold to rise.

 

Gold Production

Countries like China, South Africa, the U.S., Australia, Russia, and Peru are some of the world’s most important players in the gold mining industry. The price of gold is affected by how much it is produced worldwide; this is another example of supply and demand being met. In 2018, about 3,300 tons of gold were mined, a big increase from 2010 when roughly 2,500 tons of gold were mined.

Even though gold mine production has gone up over the past 10 years, there hasn’t been much of an increase in the last few years. One reason is that the “easy gold” has already been mined, forcing miners to dig deeper to find higher-quality gold reserves.

When it’s challenging to acquire gold, it causes more problems, like putting miners in more dangerous situations and causing more damage to the environment during the mining process. In short, the amount of gold that can be taken out of a mine affects the cost of running the mine, which can sometimes cause prices to go up.

 

Inflation

The price of gold tends to rise when inflation is high. However, it’s not untouchable and can drop as well.

When the economy is struggling during times of economic hardship, like the pandemic, the Federal Reserve begins excess money printing. That extra money in circulation can also drive the price of gold higher.

Central Bank Reserves

Gold is kept as a reserve asset by central banks alongside paper currencies. The price of gold typically increases when central banks diversify their monetary reserves by purchasing more gold rather than maintaining their holdings of the various paper currencies they have accumulated. Many countries around the world have reserves that are mostly made up of gold.

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Putting some of your money into gold as an investment makes more sense than ever because it offers protection for your wealth. If the pandemic taught us anything, it’s that we should always be prepared for the possibility that we won’t have what we need when we need it.

If you’re ready to invest or just want to learn more, sign up for your free one-on-one consultation.

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