What Causes Gold Prices to Increase?

Gold is a precious metal that is recognized as the true standard of value all over the world. It is a standard for global exchange and has been since the beginning of time. Gold holds its value from country to country and is not subject to the same systematic risk as the stock market. Therefore, when investors experience a market crash, stocks and the dollar fall.

Gold becomes more sought after and, according to the law of supply and demand, its value also increases. This is how the formula “gold rises when stocks go down” works. The price of gold is determined by the demand for it. This essentially means that, as more people buy gold, the price goes up, in line with demand. It also means that there is no underlying rationale for the price of gold.

Weakness in the dollar and inflation are among the factors likely to drive precious metal prices, according to David Lennox, an expert on CNBC's Street Signs Asia. Lennox said that it seems that everything is ready for the US dollar to go down, although it hasn't happened yet. If the greenback weakens, it would be a boon for gold, he added. Geopolitical tensions between major military powers could also push gold prices sooner than expected, Lennox said. In particular, Russia's military presence along its border with Ukraine has been building up, and that is a focus point where it could quickly turn into something disastrous. Asset bubbles occur when the price of an asset, such as stocks or housing, rises rapidly with no solid reason to suggest a higher value.

When the price of gold rises dramatically in a short period of time, usually because speculators raise prices beyond their intrinsic value, a gold bubble forms. The price may drop on any given day, simply because there were more gold sellers than there were buyers of gold on the stock exchanges that day. The dollar is likely to push up the price of gold through increased demand (because you can buy more gold when the dollar is weaker). Therefore, gold prices may be affected by the basic theory of supply and demand; as demand for consumer goods, such as jewelry and electronics, increases, the cost of gold may rise. Ciana has been optimistic about gold since early February, just before gold broke higher after months of consolidation. According to a Wall Street bank, if you consider that gold is a hedge against inflation or Armageddon itself, there are arguments both ways that simple market technicians predict that gold prices will rise again to record levels. After President Nixon closed the gold window in 1971, there was a huge increase in both the price of gold and inflation over the decade.

Meet the struggling gold miners who are missing out on the precious metals boom You'd think that anyone in the gold industry would be getting rich right now, but informal miners in many countries are missing out.

Rochelle Paker
Rochelle Paker

Personal finance specialist. Areas of expertise Banking, business, real estate, consumer credit, retirement accounts.

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