What influences the price of gold?

Answer 1

The price of gold is influenced by supply and demand, the Commitment of Traders where the shorts and longs of Commercial Hedgers (industry) battle it out with Large (banks and financial institutions) and Small speculators (you and me), and finally what the value is of the currency that gold is priced in (like the U.S. dollar).

From the standpoint of a U.S. investor, gold could be rising in price of U.S. dollars but not be rising in Euro's. Look at the 10 year chart of the dollar vs. gold and the EURO vs. gold here: http://www.kitco.com/gold_currency/charts.htm?EURO - (click "10 Years")

You'll see that there is a 70% difference in the "price" of gold for each currency. Gold is up 163% vs. the EURO as I type this (5/21/09) and up almost 240% vs. the dollar the last 10 years.

All currencies have been losing ground to gold the last 10 years, hence the demand by investors to hedge against this continued decline (granted the U.S. dollar did bounce some last year as the price of gold fell). The dollar index broke below 80 again just today (5/22/09) and has come off its recent high of around 90. Once it breaks below 72, people better be invested in gold.

Inflation, defined as the increase in the money supply, NOT an increase in price, plays a part too. As nations increase their money supply, their currencies lose purchasing power.

For example, if today all the money in the world bought all the goods in the world and then you doubled all the money in the world, you haven't created more wealth. You've just inflated the money. So now it would cost twice as much to buy all the goods in the world because of the increase in the money supply.

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