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Why Does the Price of Gold Rise and Fall?

Supply and demand are one of the biggest factors that influences the price of gold.
Raw, unrefined gold flakes can be weighed and sold for money.
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  • Written By: Dana Hinders
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 March 2014
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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.

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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.

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Discuss this Article

anon935766
Post 11

Gold will go up to $2750.

anon277105
Post 8

The great fluctuation in prices always bothers me and I always wondered about who decides this. Your article made this confusion clear.

In my view, the other monetary system is better than the present. During that time, at least we were able to purchase gold. Gold fixing must control the price of gold so that normal people can make gold an asset.

anon257993
Post 7

@anon71082: Are you sure? There are 5 years in your guesstimate. Could you be any more vague?

Perhaps, as it's now 2012 and your prophecy has come to naught, should we all sell today? I think not!

anon208688
Post 6

As long as the printing press is running, gold's price will continue to increase in relation to the loss of purchasing power due to inflation.

Banks and governments do not like citizens owning gold because then they have no way of taking our wealth by inflating the paper currency.

anon171543
Post 5

Laws are needed to control one's possessions or custody. Only this will help to prevent the hike of price of gold.

anon87429
Post 3

Why does the gold rate increase day by day?

anon71082
Post 2

Gold is up about 87 percent above the 1980 price. After 1971 we had some unrealistic gains which declined after 1980 until 2000. We have again had unrealistic gains from 2000 of 550 percent%. Personally I do not think this is sustainable. Expect the price of gold to level at the 700.00 range 2010-2014 because the market will see a stellar amount being sold.

anon20049
Post 1

Will the price of gold go up if we slip into a recession/depression, or will it continue to fall?

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