The demand for gold in the form of jewelry, technology and long-term savings means that there is a positive link between the price of gold and economic growth. This is particularly true in developing countries, where gold is often used as a luxury item and a means of maintaining wealth. Investors usually switch from gold to stocks when the economy is strong. Stocks score higher and generate higher returns when markets perform well.
When the economy slows down at some point, the value of gold often rises. This is primarily due to Federal Reserve policy. During an economic slowdown, the Federal Reserve typically cuts interest rates and widens its balance sheet to stimulate growth. This in turn weakens the dollar and causes the price of gold to rise, as gold is inversely related to the strength of the dollar
.
While the price of gold can do well in a booming or declining stock market, the main factor affecting the price is the monetary policy of the Federal Reserve. Remember that gold is a commodity and should be considered as such, meaning that gold often tracks wider commodity indices rather than deviating significantly from the overall commodity market. A few factors affect the supply of gold on the wider market, and gold is a global commodity market, such as oil or coffee.
This exposes gold as a dead commodity, where gold could fall along with other commodities if extreme risk appetite reaches the markets as investors try to cash out their commodity holdings and get on safer ground, such as an innovation of 10 percentage points among survey participants who assume that the next five years will mostly be bad times increases the real price of gold by 5%.
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%. GDP is associated with a 0.4% rise in the real price of gold and is therefore well below the 1.1% figure in the first line in Figure 4, although the coefficient in Figure 5 is estimated very imprecisely (in fact not statistically significant). We value your opinion — The World Gold Council would like to contact professional investors like you to participate in focus groups and surveys and share your feedback on the World Gold Council website experience.
At the beginning of the sample, fluctuations in inflation or inflation expectations were the most important aspect of the real price of gold. The 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. The two specifications, which can be used to assess the assumption that the price of gold also represents protection against bad economic times, speak highly in favour of this. Erb from the National Bureau of Economic Research (NBER) and Campbell Harvey, professor at Duke University’s Fuqua School of Business, have examined the price of gold in connection with
various factors.
Gold therefore stands out among commodities as a seemingly distinct type of commodity, and in fact there are many distinguishing features between gold and other commodities. 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%. Given the long-term real interest rate, an additional percentage point of inflation expected for ten years increases the real price of gold by a whopping 37%, which is in line with the long-held view of “inflation hedging
.”
