Investing in gold is one of the most reliable and profitable types of investments in the long term. In order to assess changes in gold prices in the near future, it is necessary to know the mechanism of their formation. That is, to know what the price of gold depends on.
Instructions
Step 1
In the 20th century, states held large gold reserves in order to provide gold for their national currencies. But in the 70s, in order to be able to issue unlimited banknotes, the gold standard was abandoned. Currencies began to freely trade among themselves and exchange rates began to depend mainly on the speed of issuing new banknotes and the demand for the currency. The intensity of the printing of new money also began to strongly influence the price of gold. The more the central bank prints money, the higher the price of gold.
Step 2
This circumstance led to the fact that a sharp increase in the money supply in the 70s led to a sharp rise in gold prices - from $ 43 per troy ounce to 850. In the 80s, the issuance of new funds was sharply limited, many national banks began to sell off their gold reserves. As a result, by the end of the 20th century, the price of gold fell to $ 253 per ounce. After the banks came to an agreement to restrict the sale of gold reserves, gold prices stabilized, and then, under the influence of the release of new money, gradually began to rise.
Step 3
During the global financial crisis, gold rose in price at an unprecedented rate. However, after peaking at $ 1,000, the price soon declined. During the most acute phase of the crisis, gold prices fell to $ 750, but as soon as the government again switched to a policy of increasing the money supply, gold immediately began to rise in price. Conclusion: the rise in gold prices depends on the intensity of the issue of paper money, since they can be printed as much as you like, and the growth of gold reserves is very limited. When the release of new money stops, gold prices fall.
Step 4
In the short term, gold prices depend on the stock market play. The rise in gold prices increases the number of people willing to buy it. The influx of new buyers only spurs the rise in prices. At the moment when there are no longer enough buyers for gold, prices reverse and begin to fall. Holders of gold are trying to get rid of it so as not to be the loser, which spur on the price decline for it. Sooner or later, this process stops and everything starts again. This is a simplified explanation of temporary fluctuations in gold prices. In addition, the exchange prices for gold depend on the news. For example, the news that the US is planning to stop printing dollars is itself capable of causing an instant drop in prices.
Step 5
In times of crisis, capitalists tend to invest their funds in anything but currency. Gold is a reliable instrument, but it is not a full-fledged means of payment. Therefore, the first reaction of the market to the crisis is expressed in a fall in gold prices. Then, when the central banks of developed countries begin to fight the crisis by increasing the money supply, the price of gold rises again.
Step 6
Even political news, once interpreted, can change the price of gold. For example, the Russian-Ukrainian conflict in 2014 led to a slight increase in prices. This is due to the fact that the conflict will one way or another lead to an increase in military spending in developed countries. The increase in spending will lead to a deficit in government budgets. And this deficit will be covered by the issuance of new banknotes.
Step 7
The catastrophic exacerbation of the global crisis will lead to a sharp rise in gold prices up to its recovery in the role of world money. Such a scenario is, of course, unlikely. Even if the situation comes close to that, the authorities are likely to restrict the circulation of gold to individuals, to the point of prohibiting them from owning it, as was the case during the Great American Depression.
