If you’re looking to secure your investments in the face of a possible recession, you’re probably interested in purchasing some gold or precious metals, right? These tangible goods are our hedge against many of the fears that keep us away from the markets: inflation, unexpected collapses, and troublesome tweet storms from top politicians.
But have you ever wonder, “what is it, exactly, that sets the price of gold?” Who or what factors have the biggest impact on the price of this much sought after commodity?
Today at The Street, there is an excellent piece about exactly what those factors are. You may be surprised to learn that there is not, in fact, a little cartoon duck swimming in pools of the stuff that decides what price he will sell gold at on a given day.
Instead, there are a number of significant factors that can move the price up or down. We’ll let The Street do most of the talking, but there is one particular factor that we want to discuss in more detail.
Gold vs. USD
The price of gold actually has an inverse relationship with the U.S. Dollar. This means that when the USD goes up, the price of gold goes down, and vice versa.
The cause for this is fairly simple: the majority of gold traded internationally is denominated in the USD. Therefore, the price of gold and the value of the dollar have a strong relationship. But because most trading gold is done as a hedge against negative effects, its value increases when the value of the dollar decreases.
Simply put: when the dollar is strong, people are less interested in gold.
That’s important to remember as we consider whether to invest in gold going forward: remember to look at the direction of the dollar. If it’s on the downswing, it might be the right time to switch some of your investments over to precious metals.