Fluctuations in gold prices in USA directly reflect investor’s perceptions about the condition of US and other global economies. The changes in gold prices in USA can be understood in relation to US dollar. US dollar acts as the worldwide reserve currency. It is a medium to carryout international trade, as the reserves of the currency are kept by the central banks of the economies for foreign exchange. There is an inverse relationship between gold prices and stability of US economy, as is evident from the fact that hikes in gold prices were coupled with a struggling US economy.
Before making gold as a preferred investment option, it is utmost important for the investors to realize the potential relationship between gold prices in USA and various key economic factors. These indicators include US dollar, inflation and interest rate. Succinctly, an increase in gold prices is a result of weak dollar, heightened inflation and a decrease in interest rate, persisted over longer periods of time.
Discussing the nature of relationship between gold prices and US dollar, academics cum economists report a direct negative association between the suggested variables. It is to say that an increase in gold price in USA is reflected in weak dollar state, while reverse holds equally true. The adjectives, weak or strong, defining the state of dollar is ascertained in relation to a portfolio of currencies, dollar is trading against. To put it more precisely, if the dollar is weaken against the Japanese Yen, it simply means that more of dollars are needed to buy less of Yens, in comparison to past. If the situation continues, it will bring an end of investor’s confidence in dollar, followed by a decision to invest in gold, thus, justifying the negative relationship.
This yellow metal is often used an instrument to hedge against the price hike phenomenon, commonly known as inflation. In economic terms, inflation is nothing more but, a reduction in purchasing power. The concept entails the usage of more number of dollars to buy the same goods and services, as in the past. The immediate outcome of inflation is the loss in the value of dollar, coupled with investors’ no confidence motion against dollar. This asks them to look for other tangible assets to make investments, and obviously, out of the lot, gold is the preferred option. When increased number of people invests in gold, the upshot is inflated gold prices.
As is the case with dollar, there is a direct inverse relationship between market interest rate and gold prices. Stable economies offer a high market interest rate on TBs, TOs, CODs, etc. Henceforth, treasury notes, certificates of deposits, treasury bills are the preferred investment options as they offer a return greater than the inflation rate. However in opposite scenario, a high inflation rate and a low interest rate will generate negative returns; and these negative returns present gold as a lucrative option to investment, dictating marked increase in gold prices.
After having discussed the sources that can potentially affect the gold prices, it is now feasible to discuss the route of gold prices in future. The statistics of last few years proof that the gold prices hit an all time low in year 2015.It is predicted that this continue in future. The forces of demand and supply help gauging the expectations for future. Gold in any economy, primarily serves two functions; a commodity and a store of value. In the role of latter, gold is unlike other assets, as it yields zero return and money is used to store it. Analyzing the situation, as for now the investors who had made sound investments in gold are stuck in a difficult situation. Although, this shiny yellow metal saw an upward slumping boast after the financial crisis till the 2011.But after that the price witnessed a continuous downward trend. There are predictions suggesting that the gold prices in USA may touch an all time low of $1000 an ounce, till the end and beginning of next year.
The potential question that arises from this discussion is why the gold price is falling down and is this trend predicted to continue in future? Well! The answer to the former part of the question points towards a strengthen dollar, spiking the American economic recovery process. Look out for the statistics of US dollar index, backing the above stated assertion. The dollar index (base: March 1973= 100), is currently is close to 98, in comparison of 78.3 in April 2011. Strong dollar is associated with a stable American economy and this stability is linked with increased interest rates, which, as discussed earlier, is definitely not good for gold prices. For the latter, the economists speculate that the trend will continue in near future.