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What Drives the Gold Spot Price to Change?

From jewelry to electronics to dental fillings to money, the many demands of gold change daily, and so does the price. Each industry pushes and pulls the price depending on its own global demand.

Jewelry plays a major role in the gold’s daily fluctuations. The World Gold Council estimates the jewelry industry accounts for roughly 50% of the world’s annual gold demand. Much of this demand comes from India, where large purchases of gold jewelry have been part of the local tradition for ages. Any interruptions in this market will have a noticeable effect on the gold price. For instance, when India’s government imposed a short-lived import tax on gold in March, gold for immediate delivery fell .2%.

Fortunately, monetary demand has helped soften price corrections. Central banks in developing markets and large private buyers are on the lookout for dips in order to add to their stockpiles. Suspicion is growing about the value of the US dollar and the euro, so gold is sought as an alternate safe haven. Many Chinese, in particular, have a cultural affinity for gold bullion like Indians do for jewelry. Chinese families often give gold coins as gifts on special occasions. This has only increased with a government campaign to promote private ownership of gold. Investment now makes up roughly 40% of annual gold demand.

Industrial sources of demand for gold most prominently include electronics (as gold provides an excellent mix of conductivity and corrosion-resistance) and dentistry (where gold is utilized for its malleability). Industrial uses make up about 10% of annual demand for gold. The commodity markets are notoriously volatile, so having large sources of non-industrial demand actually works to stabilize the gold price relative to other precious metals.

However, demand is only one side of the price equation; there’s also supply. Gold miners add about 1.5% more metal to the global gold stockpile per year. That means that there is some ‘inflation’ built into gold. The difference is that gold’s inflation stays very stable over time, and is far less than the fiat currencies. That’s why gold is a better store of value.

What really makes the gold price confusing is that it is commonly priced in terms of US dollars, which endure their own international supply-and-demand pressures. So, even while the price of gold may appear to be falling in terms of dollars, the purchasing power of gold may still be increasing.

Consider May 2nd of this year: gold fell .53% priced in dollars and .44% in euros, but it gained .37% in pounds sterling.

Gold competes with other money as a store of value. Despite fluctuations in their relative prices, over time, gold tends to increase in purchasing power while fiat currencies decrease. Take buying an automobile for example. In 1985, the average price of a car was $9,000, or 28 ounces of gold at ’85 prices. This year, the average price of a car is $30,000, or only 19 ounces of gold at today’s prices. So a person keeping $9,000 in US dollars over the last 27 years would now be able to afford only 1/3 of a car, while a person holding gold would be able to afford a car and a half.

While gold’s value is terms of currencies will fluctuate, the long-term purchasing power of gold is what is important – which is why people have chosen gold as a store of value for thousands of years.

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