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Changes in the Price of Gold- Impact on the Economy

By PolicyBazaar

Invest in GOLD and give a boost to your investment portfolio

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There are various investors that believe the change in the rates of gold may have an impact on the country’s economy. There are some of the industries wherein the gold rates have a direct impact. The same is the case when it comes to the gold rate in UAE. However, we should consider that the gold prices ‘reflect’ the conditions of the economy being a reason behind it.

Let us go through the different ways in which the gold rates can behave with respect to the economic changes.

A Boom in the Economy

When the economy of the country is at its boom or is strong, the assets apart from gold may perform well. There will be a rise in the value of the stocks, hence, driving the demand for investment away from the precious metals as well as other commodities, which do not create any income.

On the contrary, if the economy becomes weak, there is a fall in the demand for stocks & other financial assets, hence, driving more demand towards investments that seem more stable like gold and cash.

Inflation

Inflation is a threat to the value of financial assets such as bonds and stock. Therefore, it makes the gold look more attractive in terms of the store of value. Since inflation usually brings with it times of unrest in the economy, there are many investors who look upon this precious metal as a safe investment, which will come to their rescue in times of distress.

Gold is considered to be a financial saviour in situations ranging from geopolitical disputes to systematic financial risk. When the investors lose trust in the currency, it is but natural, that their focus shifts to gold. This, in turn, helps in pushing the prices up.

Currency Market

Generally, the gold rates tend to lead to changes in the US dollar value as compared to the other currencies of the world. If the dollar is performing well, it means that even though the prices of gold stay flat in terms of the dollar, gold will be more expensive in the countries where the value of the currency has declined.

This, in turn, tends to cut down the demand and put more pressure on the prices of gold, pushing them down in the terms of the dollar. When the dollar is weak, the situation becomes the opposite as a fall in the prices in terms of other currencies makes gold more attractive to buy. This causes a rise in the demand, pushing the gold rates to rise.

Rates of Interest

Just like all the other factors discussed above, rates of interest are also in correlation with the gold prices. Low rates of interest make is simple to select gold as an alternative for bonds and various other fixed-income investments. This is because they pay only a little in income and involve a risk of the substantial decline in the value when the prices rise.

On the other hand, the high rates of interest make bonds even more attractive as opposed to non-income-producing assets such as gold. The high cost of borrowing for the investors who have opted for loans to purchase this precious yellow metal also makes the gold demand dry up quicker than usual.

To Sum Up!

Obviously, the fact that these factors and the others might move in different directions simultaneously make it clear how difficult it could be to check the relationship between the gold market and economic conditions.
Nevertheless, getting the idea of certain perceived fundamentals on the functioning of the gold market may help you in investing more efficiently in this commodity.