Why does the Price of Gold Rise and Fall?

Gold is one of the oldest forms of investments available, but many people do not understand how the price of gold is set. Whether you are interested in diversifying your assets or worried about the consequences of an economic depression, it is important to understand the factors that influence rising gold prices. The official price is set twice a day, and is strongly influenced by supply and demand.

At one time, the value of gold was based on the gold standard. Under this monetary system, citizens were able to convert paper money into fixed quantities of gold whenever they wished. The gold standard ended on 15 August 1971 when governments were given the freedom to print as much paper money as they saw fit.

Today, the price of gold is set by the Gold Fixing. Also known as the Gold Fix or London Gold Fixing, this is a meeting of five members of the London Gold Pool conducted twice a day by telephone, at 10:30 GMT and 15:00 GMT. Officially, the purpose of the Gold Fixing is to settle contracts between members of the London bullion market, but the Gold Fixing is widely recognized as the benchmark used to price gold and gold products throughout the world.

People can invest in gold directly through bullion ownership or opt for indirect investments such as certificates, derivatives, or shares. As with most other forms of investments, the price is greatly influenced by supply and demand. Unfortunately, gold is rather unique in that most of the gold ever mined is still in existence and could thus enter the market at any time. This leaves the price open to influences from hoarding and disposal practices.

During times of national crisis, such as a war or a serious natural disaster, the price of gold tends to greatly increase. People start to fear that their paper currency may no longer hold value, but they see gold as a stable asset that can always be used to purchase food and other necessities.

Another common factor influencing rising gold prices is the success of the real estate market. When there are low or negative returns on real estate, the demand for gold and other commodities typically is expected to increase.

Bank failures, although somewhat uncommon today, can also contribute to an increase in the price of gold. The best example of this occurred during the Great Depression, when rising gold prices due to bank failures led US President Roosevelt to ban the holding of gold by private citizens.