

Saturday, November 29, 2014


Central banks and interest rate also play crucial roles in determining the price of gold. The monetary policies formulated by the central banks to keep inflation below its target affect the prices of gold. Interest rates are inversely proportion to the prices of gold. If the interest rate increases, it is expected for the prices of gold to decrease because it earns no interest. As the result of monetary policies formulated by the central banks about interest rates, the prices of gold are closely correlated to the central banks.

Source: trunews.com
The dollar is the main drive in the currency markets. Most currency pairs have USD as their base or counter currency and so, the slightest change in the value of the USD affects a whole lot of currency pairs. Whenever the price of gold rises, the value of USD depreciates and vice versa. This can be a helpful tool for fundamental analysis traders. If the USD is trending more weaker, there is more confidence in buying EUR/USD, GBP/USD or selling USDCHF. If the USD is trending stronger, we can feel more confident in selling EUR/USD and buying USD/CHF. If the price of gold trends stronger, then we can consider selling any currency pair with USD as it's base currency and buying any currency pair with USD as it's counter currency.

For forex traders who deal using fundamental analysis, they pay critical attention to diverse news related to gold which can have a maximum impact on the USD due to their negative correlation. Gold has enjoyed strong correlation to some currency pairs known as commodity pairs ; AUDUSD, NZDUSD and USDCAD. AUD has the strongest tie with gold because it is regarded as one of the largest gold producers.

In the first paragraph, I talked about how the supply of gold can affect its prices. When there is a lot of influx of gold in the market; that is the supply of gold into the market increases, the price of gold decreases and the demand for gold becomes very low. If the supply increases, it brings out about excess supply which causes the price of gold to decrease. Any country who invested a lot of money in gold will experience losses even though countries rarely invest in gold.

I hope you have all heard of gold reserves? Gold reserves simply means the amount of gold held by a central bank intended as a store of value. As at September, 2014, United States is the country with the highest amount of gold reserves; about 8,133.5 tones. Germany has the second highest amount of gold reserves worth 3,384.2 tones. International Monetary Fund has the third highest followed by Italy,France,Russia,China,Switzerland,Japan and Netherlands. If the countries above start selling their gold reserves, it could decrease the value of gold because the supply will be higher than the demand. The price of gold generally declines when central banks decide to sell gold reserves.

It's amazing how United States have the highest amount of gold reserves but are not the top producer of gold. And it's also amazing how the top gold producer in the world doesn't have the highest amount of gold reserves. For many years, South Africa was the worlds dominant gold producer, but recently other countries with large surface area have surpassed South Africa, including China,Russia,United States, Peru and Australia. China is the worlds dominant gold producer with about 420 metric tones in 2013 due to its large surface. Australia is the second largest followed by the United States, Russia,Peru,South Africa, Canada, Mexico, Uzbekistan and Ghana.

The amount of gold produced by a country and also the amount of gold reserves a country has can have diverse effects on its currency value. Gold is mainly used to hedge against inflation. When a country experiences high inflation, investors turn to buy large quantities of gold. The demand of gold increases during inflationary times due to its limited supply. The value of a currency is strongly tied to its imports and exports. If a country imports more than it exports, it will witness a depreciating currency. If a country produces large quantities of gold and exports it, it increases the value of its currency. If a country has gold reserves or produces and exports gold, it will see an increase in the strength of its currency when gold prices increase, since this increases the value of the countries total exports.

Demand and supply are the two major factors that affect the price of gold. But unlike most commodities, consumption doesn't play a major role in determining its price but rather saving and disposal. The two renowned gold prices are the gold fixed prices and the gold spot prices. The gold fix price can also be referred to as the London fix and are determined by the London Bullion Market Association(LBMA) which includes more than 100 of the world largest banks, perfectionism metal stakeholders and financial institution. A twice daily telephone meeting of representatives from five bullion-trading firms of the London bullion market.

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