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Jan 25, 2011

The cause of gold price flactuate

Posted by PutraDinar

If you ask yourself or people beside you on “what makes the price of goods and services goes up?” one might say “it is because of inflation, inflation means the rising price of goods and services” and you ask again “inflation? Inflation is only a term, how can it make the price to increase? Some of the people would definitely blurt out the word inflation when they saw there is an increase in the price of goods and services, but do they really know what the meaning of inflation. Inflation can be cause by many factors such as, increase in money supply (act of printing money), cost push inflation (decrease in aggregate supply cause by higher production cost), demand pull inflation (excess demand cause by private and government spending to stimulate investment and expansion), international lending and national debt, a deep drop in exchange rate and taxes. Most of these factors helped in the existence of inflation, where we are the sufferer. Simply to say that inflation occurred as one way to narrow the gap of government’s debt and inviting the people to share their burden in which the additional cost that they have to carry has been transferred to the people.

What causes the price of gold to be fluctuating?

Selling gold has constantly been well-known among the people during the ancient times and also a major player in the trade market. It was definitely precious metals that keep on attracting the eyes of all who came in contact, regardless of the buyers, sellers and consumers. The fluctuation of the price of gold depends on a variety of situations that revolves around the acquiring and selling of the product in which we could say that the desire for gold has remained the same up until today.

Gold can be as saving and/or investment vehicles which move up and down and it’s usually difficult to determine what causes the fluctuations. If we based on reality, the gold price directly connected to a few main factors. These factors appear simple on the surface, but are part of a complex system that can be confusing to beginners. These factors may be recognizable to each one of you; however, it can be as a reminder and a basic framework for understanding how gold prices move or it can be use in helping you to identify the best time to sell or buy your gold.

Firstly, we will take a look at currency inflation:

Inflation is often thought of as an increase in the prices of good. For example, when consumers visit the grocery store and notice the price of fruit has increased, they attribute the increase to inflation. This perspective is inaccurate. Inflation is technically an increase in the money supply. This has a direct effect on how gold prices move in relation to a country’s currency.

To explain, suppose you used every U.S. dollar to purchase every product in the world. Further suppose the money supply is then doubled. The extra dollars now floating through the system represent inflation. The value of every existing dollar declines by half. Essentially, it would now require two dollars to purchase something that was once sold for a single dollar.

Gold is used as an exchange unit of value because it cannot be arbitrarily produced. It is a near-perfect store of value against supply and demand. When the supply of dollars (or any currency) is inflated, the price of gold increases as the per-unit value of the currency declines. Conversely, during times of monetary contraction (i.e. when dollars are “soaked up”), the price of gold goes down.

Centtral Banks
The above discussion leads directly into the role of central banks in the context of how they influence gold prices. They can do so in two distinct ways. First, central banks can decide to sell a portion of their reserves or buy more on the market. The amount sold each year is limited to 400 tonnes to help avoid a glut in the market that drives prices downward. The second way central banks influence the price of gold is through loan agreements with the central banks of other nations. This area is incredibly complex and involves the International Monetary Fund.

Both levers (i.e. purchase or sale on the market and loan agreements) have a powerful influence on interest rates and thus, the sale of government bonds. For this reason, central banks usually try to keep the price of gold from climbing.

Increase in Demand
Several other factors can trigger a surge of demand for gold, which pushes its price upward. For example, during times of political unrest and war, countries often travel a path of monetary expansion. This causes the nation's citizens to lose faith in the value of their currency. As a result, they move their assets into gold.

Mining production can also play a role. While gold cannot be arbitrarily produced, it is mined each year throughout the world. Typically, only a small amount is mined, which means the world's "above surface" supply remains relatively static. Large deficits also support high gold prices. When deficits become extremely high, there is a risk of default. This drives people from the nation's currency into gold, triggering another surge in demand (and price).



Hamizah Azmi

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