What Affects The Price Of Gold?
Gold is one of the great traditional forms of savings or investing. Traditionally, families would give gold jewelry to newlyweds as a sign of good luck, but also as an emergency fund for rainy days.
Modern investors look to gold as a safe investment for the risk averse. The price of gold doesn’t increase very quickly, but it does appreciate at a steady rate. They may not make a lot of money from it but there’s no risk of a market crash either.
There’s no escaping mentioning the factors that affect the price of gold in this conversation. Therefore, we are not only going to just list the price of gold here – but also provide you with information on what affects it.
Current price of gold
Below are the current Kijang Emas buying and selling prices (as of writing) as listed by Bank Negara Malaysia.
Source: BNM Kijang Emas
The price of gold in Malaysia has spiked since the beginning of 2019 as investors look to safe havens from looming economic uncertainty. It hit an all time high by mid-2020 and still trending in the higher end of the price bracket. However gold prices have come under negative pressure recently.
Prices dipped slightly between 2013 and 2015 but have recovered to reach new heights. In fact, it has climbed 58% over the last five years.
Despite this upward trend, there are some pointers to consider before investing in gold.
1. US dollar exchange rate
This is likely the biggest variable in determining gold price fluctuations.
It’s enough to remember global gold is traded in US dollars, and an increase in exchange rate will result in an increase in local prices. Conversely, a stronger ringgit will lead to lower gold prices.
Keeping an eye on the US dollar exchange rate is important when trading in gold as it could affect your buying and selling prices.
Gold prices tend to increase during times of high inflation. Commodities rise during this time as investors use them as havens to ride out uncertain times. Gold is often used as an alternative form of savings when confidence in the local currency is low.
However, there are times when this bucks the trend. The current gold rally is a good example, according to a recent EdgeMarkets report. In this era of negative bond yields amid a low inflationary environment, the gold market has been rallying.
Similarly, gold-backed exchange traded funds as well as the futures and options market for trading precious metals like gold, silver and copper will continue to see plenty of activity given the market conditions.
3. Global economy
Economic instability tends to send investors running to secure their money. As mentioned before, gold is one of the more popular places to park investments and wait out any sort of economic depression or trade war.
However, this also leads to the selling price of gold increasing due to a rise in demand.
In fact, this rise in demand is not only limited to times of economic downturn. The importance of gold as a raw material in the manufacture of electronics also leads to higher demand when the economy is soaring as well. This is mainly due to people having more disposable income and being able to spend more.
Interest rates set by central banks is often an indicator for where the price of gold is going. Lower rates tend to mean that the price of gold is set to increase, and higher rates are often followed by lower prices.
To be fair, interest rates are adjusted based on how the economy is going. Lower rates are introduced to spur growth if things are slowing down. At the same time, investors look to safer investments during downturns.
Where do you buy gold?
For most, buying gold involves actually receiving a physical product. Traditionally this would take the form of jewelry, but modern times also includes small blocks. In practice, you would keep this gold either at home or in a safe deposit box until a time when it needs to be liquidated.
In this case, gold can be bought from any regular jewelry store. However, if you are buying with the aim of trading, this practice is not recommended as the resale value of jewelry can end up lower than the purchase price; at least in the short term.
A safer alternative would be to invest in gold through a financial institution. Banks often have gold investment accounts that allow individuals to pool their money to buy entire lots of gold. Depending on the type of investment agreement, this may or may not specify a particular lot of gold.
For example, the account will declare that you own 5g of gold. The bank could own a stockpile of gold and simply say that you own a portion of it without actually saying which particular bullion it is.
Alternatively, your bank may have actually bought the gold bullion and stored in it a vault for you to point at and say “this is mine”.
For the most part, there is no practical difference between these two types of owning gold.
Should you invest in gold?
Gold is considered a safe investment because the price doesn’t drop by much and it tends to rebound eventually. However, it is also a very low yield investment because the price doesn’t increase very fast under normal circumstances.
Basically, you cannot go wrong investing in precious metals, especially if you’re really averse to risk and want something very stable.
This article was first published in October 2019 and has been updated for freshness, accuracy, and comprehensiveness.