4 Factors That Traditionally Impact Gold’s Value (And What’s Happening Now)

When it comes to diversifying a financial portfolio, precious metals are always mentioned as being a good choice – and gold in particular. But before you invest in …

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When it comes to diversifying a financial portfolio, precious metals are always mentioned as being a good choice – and gold in particular. But before you invest in anything, it’s smart to understand what’s going on behind the scenes. In 2017, there’s a lot to consider.

4 Factors That Move Gold Prices

While gold prices don’t tend to move a whole lot over a short period of time, there are a lot of different factors that can affect the valuation. When you study gold price trends over the years, it’s apparent that the following factors are heavily involved in the ebb and flow of this precious metal.

  1. Global Crises

Much like the stock market – or even real estate to an extent – gold prices can be influenced by what’s happening in the global geo-political scene. However, unlike the stock market, where prices sink when turmoil is present, gold prices generally increase when people are feeling uncertain.

Gold values increase when other investments diminish because this precious metal is seen as a source of safety. If money, stocks, and other holdings cease to hold value, gold suddenly becomes even more prized.

  1. Inflation

Gold is also considered a good asset for hedging against inflation. While currencies may change in terms of what a single unit can purchase, the theory is that gold holds value all over the world and is a much safer asset. For example, even if the U.S. dollar were to suddenly become globally irrelevant, gold would still have worth in other countries.

  1. Government Reserves

The United States is one of a handful of countries that actually holds gold as part of its national reserves. When the central banks in these countries buy gold in larger quantities than they sell, the supply becomes scarcer and prices are driven up. When they sell more gold than they buy, the supply increases and prices go down.

  1. Changes in Global Currency Valuations

As global currency valuations change over time, the price of gold also fluctuates – and it’s usually in the opposite direction. For example, as the Euro gets stronger, the value of gold goes down (and vice versa). This speaks to how people view gold – as a hedge, rather than something they actually use to trade or barter with.

What’s Happening in 2017?

While gold has been down for a couple of years, Adam Shell of USA TODAY proclaims it’s “glittering again on Wall Street.” While good news for gold investors, this could be bad news for everyone else.

“Even though gold is up nearly 11% this year, which is better than the S&P 500’s 9% gain, Wall Street pros still think gold can be an effective hedge and offer protection to investors’ portfolios during what could be a turbulent September,” Shell explains. “The biggest driver of gold prices could be the uncertainty surrounding approaching deadlines for Congress related to the nation’s budget and raising of the debt ceiling.”

While some may also point to rising interest rates as a sign that gold prices could be on the move, this isn’t necessarily true. If you study historical interest rates, they don’t necessarily line up with gold prices very well. And when you consider that it’s going to take a lot to bring interest rates back up to pre-2008 levels, it’s unlikely that gold will be affected much by rising interest rates in the United States.

As with any investment commodity, it’s impossible to tell, for certain, where the price of gold is headed. However, when you study some of the global turbulence going on right now, it’s hard not to feel a little optimistic about gold.

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