Gold prices often reflect economic conditions around the world. When the global economy is healthy, with low unemployment and inflation, gold prices tend to plateau. However, during an economic downturn or an unexpected financial or economic collapse, gold is often one of the most reliable investments you can make. It’s seen as one of the ultimate safe-haven investments. Here are a couple of ways that the financial markets affect the spot price of gold.
The Impact of High Inflation on Gold
Stocks and bonds take a dip when the economy experiences high levels of inflation. During these periods, the value of the dollar decreases. This makes items that are priced in dollars, such as gold, more expensive. By investing in gold before inflation rates rise, you can profit despite an economic downturn. Buying gold coins and bullion during or before periods of high inflation is a reliable method of protecting the value of your assets.
How Gold Performs in a Strong Economy & Stock Market
Investors usually shift from gold toward stocks when the economy is strong. Equities command higher values and generate higher yields when the markets are performing well. When the economy eventually slows down, the value of gold oftentimes increases. This is driven primarily by the Federal Reserve’s policies. During an economic slowdown, the Federal Reserve typically reduces interest rates and expands its balance sheet in an attempt to stimulate growth. This in turn weakens the dollar and causes gold prices to increase because gold is inversely related to the strength of the dollar. While gold prices can perform well in a booming or declining stock market, the primary factor affecting the price is the monetary policy of the Federal Reserve.
Gold and International Currency Markets
The value of gold also shifts based on the strength of the U.S. dollar against foreign currencies. Gold is traded internationally in dollars. So when the dollar is performing well against other currencies, investors in foreign countries shy away from gold because it becomes more expensive for them. This drives down demand, and the spot price of gold eventually falls. Conversely, when the dollar weakens, the demand for gold increases around the world because it is more affordable for investors who hold other currencies. This drives up the price of gold, benefitting people who already have significant holdings.
With a solid understanding of how different economic factors affect gold prices, you’ll be better placed to make wise investments. Whether you’re new to investing or want to diversify your assets, Atlanta Gold & Coin Buyers is here to help. We provide transparent appraisals for coins and bullion, and we’re happy to offer advice and other educational resources. Contact us today to schedule an appointment.