Supply, demand, interest rates and investor behavior are important drivers of the price of gold. Gold is often, but mistakenly, used to hedge inflation because it is assumed that gold will appreciate in value and offset inflationary pressures. Gold is subject to investors’ risk sentiment. Therefore, the price of gold can be affected by the basic theory of supply and demand.
This means that as demand for consumer goods (such as jewelry and electronics) rises, gold prices can rise. The German engineering group Siemens is perhaps recording the best growth of all time in India. The country’s oldest multinational company has aggressively applied for and won cross-segment contracts. The most recent was an order from Indian Railways worth £26,000 billion. An change of 1 percentage point in the expected ten-year real interest rate (the nominal yield of ten-year government bonds minus the PTR) is accompanied by a fall in real gold prices of 3.4%
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In striking contrast to the result in Figure 4, innovations in the PTR play no significant role in the price of gold after taking into account the real interest rate. Since the CPI is only published monthly, the dependent variable is the daily change in the nominal price of gold. Here, the conceptual experiment consists in asking how news about the explanatory variables is reflected in simultaneous changes in the logarithmic real gold price. At the beginning of the sample, fluctuations in inflation or inflation expectations were the most important aspect of the real price of gold
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dollar and the desire to hold gold as a hedge against inflation and currency depreciation are all contributing to driving up the price of the precious metal. Since gold is a durable asset with a relatively stable dividend yield, its price is expected to be strongly inverse to the long-term real interest rate. Gold purchases by central banks have an impact on the price, as does the demand for gold for use in jewelry and technological devices. The estimated coefficient for the yield on ten-year government bonds minus the PTR suggests that an increase in the long-term real interest rate of one percentage point reduces the real price of gold by
13.1%.
The value of gold ultimately results from a social construct that is based on the agreement that gold was valuable in the past and will remain valuable in the future. From 1971 to around 2000, the real price of gold and long-term inflation expectations tend to move in parallel. Although the metal has proven its ability to maintain its value over time, the price of gold is often volatile in the short term. This means that the price of gold usually rises when the interest rate falls, a parameter that is directly proportional to the strength of the economy
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A sharp rise in inflation expectations in the period 1971—80 coincides with a dramatic rise in gold prices. When expected or actual returns on bonds, stocks, and real estate fall, interest in gold investments can rise, driving up the price
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