The dollar plays a key role in storing wealth and as a medium of exchange. In the post-war period, the Dollar has been viewed as the dominant global currency. Germany, Zimbabwe) would cause people to store as much wealth in physical assets such as gold. A key issue is whether market fears inflation could get out of control.Īny prospect of hyper inflation (e.g. However, if you get a situation of high and volatile inflation, you are more likely to have negative real interest rates. If inflation is 6%, but interest rates are 8%, you can still protect the value of your savings in a bank. Note, it also depends on the real interest rate. The most important inflation-proof investment is seen as gold. Therefore in periods of high inflation, people will seek to switch out of cash and into physical assets which retain their value. If inflation is very high, then money can soon lose all its value. However, if inflation increases to 20%, then money (notes and coins) will reduce in value. With inflation of 0%, money retains its value. This investment demand is the primary factor behind the increase in the price of gold between 20. This can lead to higher demand for gold to store wealth. At various times, investment trusts and individuals will have a greater demand for saving their wealth in the form of gold. Gold will hold its value even during inflation. Gold is seen as a desirable element in an investment portfolio. As gold is a luxury good (income elasticity of demand > 1) then a rise in income in India could lead to a bigger % demand for gold. Economic growth in India increases disposable income and therefore demand for gold. Markets like India have a strong demand for using gold in jewellery. The world consumption of new gold produced is about 50% in jewellery, 40% in investments, and 10% in industry (excellent as conductor and resists corrosion) Main factors affecting the price of gold However, it also is seen as an important way to invest wealth – especially in times of economic uncertainty. It is an important commodity in certain products such as jewellery. The price of gold is determined by several factors. This led to a sharp fall in the price of gold. In 1979-80, there were fears over rising inflation in the west and also political uncertainty (Soviet Union invasion of Afghanistan), But these fears failed to materialise in the 1980s and inflation was brought under control. Adjusted for inflation, the record gold price reached $2,500 in 1980 (just over $600 in nominal terms) However, after this 1980 peak, the price of gold fell sharply. Speculative demand to hedge against inflation and economic uncertainty.Demand for use in goods such as jewellery. ![]() A look at the different economic factors that determine the price of goldĮssentially the price of gold is determined by:
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