This essentially means that, as more people buy gold, the price goes up, in line with demand. It also means that there is no underlying basis for the price of gold. Weakness in the dollar and inflation are among the factors likely to drive precious metal prices, David Lennox told CNBC's Street Signs Asia on Monday. Lennox said that it seems that everything is ready for the US dollar to go down, although it has not yet happened.
If the greenback weakens, it would be a boon for gold, he added. Geopolitical tensions between major military powers could also push gold prices sooner than expected, Lennox said. In particular, Russia's military presence along its border with Ukraine has been building up, and that is a focus point where it could quickly turn into something disastrous, he said. Do you have any confidential news? We want to hear from you.
Get this delivered to your inbox and learn more about our products and services. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions achieve financial freedom through our website, podcasts, books, newspaper columns, radio shows and premium investment services. Interest rates have a major influence on gold prices due to a factor known as opportunity cost. Opportunity cost is the idea of giving up an almost guaranteed profit on one investment because of the potential for a greater profit on another.
With interest rates remaining close to historic lows, bonds and CDs are, in some cases, producing nominal yields that are lower than the national inflation rate. This leads to nominal gains but real money losses. In this case, gold becomes an attractive investment opportunity despite its 0% return because the opportunity cost of giving up interest-based assets is low. The same can be said of rising interest rates, which drive returns on interest-bearing assets and increases opportunity costs.
In other words, investors are more likely to give up gold as interest rates rise, as they would get a higher guaranteed return. Another determinant of gold prices is US economic data. UU. Economic data, such as employment reports, wage data, manufacturing data and broader-based data, such as GDP growth, influence the Federal Reserve's monetary policy decisions, which in turn may affect gold prices.
While not set in stone, a stronger US economy (low unemployment, job growth, manufacturing expansion, and GDP growth above 2%) tends to drive gold prices down. Strong economic growth implies that the Fed could make a move to tighten monetary policy, which would have an impact on the opportunity cost dynamics discussed above. On the other hand, weak employment growth, rising unemployment, weakening manufacturing data and lower GDP growth may create an accommodative Fed scenario on interest rates and increase gold prices. A fourth factor that can affect gold prices is inflation, or the increase in the price of goods and services.
While far from being a guarantee, rising or higher levels of inflation tend to push gold prices higher, while lower levels of inflation or deflation weigh heavily on gold. Inflation is almost always a sign of economic growth and expansion. When the economy grows and expands, it is common for the Federal Reserve to expand the money supply. The expansion of the money supply dilutes the value of each existing currency note in circulation, making it more expensive to buy assets that are perceived as a store of value, such as gold.
This is why quantitative easing programs that saw the money supply grow rapidly were considered positive for physical gold prices. In recent quarters, inflation has been relatively moderate (just above 1%). Lack of inflation has been a factor that has forced the Federal Reserve not to raise credit rates, but it has also kept gold prices low, which normally perform better in an environment of rising inflation. This tug-of-war between interest rates and inflation can play a constant tug-of-war on gold prices.
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