How Do Gold Prices Affect the US Economy?
Gold is the most popular investment option among all the precious metals. Investors generally buy gold as a way of diversifying risk. The gold market is subject to speculation like other markets, especially through the use of futures and derivatives. Gold price in USA has shown a long term correlation with the price of crude oil.
This suggests a reason why gold is sold off during economic weakness. Gold is the most important fiscal meter, and the variations in bullion prices can give details about the investor outlook about the utter of the U.S. and global financial system. An augment in gold prices in USA characteristically signals that the U.S. economy is under pressure. Dynamics that supply to an amplification in the charge of gold include a weak dollar, a boost in price increases and low interest rates over the extended period.
Gold prices have faced a sharp decline in its prices in the previous year. the gold price stood at $1,286.50 per ounce at the beginning of the September last year, with prices closing at $1,251 per ounce at the close of trading in the same month.
Let’s take a look how it affects the US economy:
Gold and Mining
The only real direct effect gold prices in USA has on the US economy is in the mining sector, where individual corporations are highly susceptible to any vacillation. Because gold miners make their profit from selling gold, their profit margins are largely determined by the existing market value of the articles of trade. In past decades, miners prevaricate their production in the futures market to create some permanence and lucidity, but that practice principally wrecked in the first decade of the twenty-first century as the volatility of gold and its rising price made it unbeneficial to do so.
Gold is used to hedge against inflation.
Shareholders characteristically purchase outsized amount of bullion when their realm is experiencing high echelons of inflation. Gold affects on US inflation prevails in the form of increased demand for gold during inflationary times due to its intrinsic value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency. In April 2011, investors feared moribund values of fiat currency and the price of gold was driven to a astounding $1,500 an ounce. This designate there was little self-assurance in the currencies on the world marketplace and that expectations of future economic stability were grim.
The price of gold affects countries that import and export it.
The value of a nation’s currency is stalwartly tied to the worth of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, US being country that exports gold and has access to gold reserves has seen an increase in the strength of its currency when gold prices in USA increase, since this increases the value of the country’s total exports.
In other words, an increase in the price of gold can create a trade surplus or help offset a trade deficit. Conversely, countries that are large importers of gold will inevitably end up having a weaker currency when the price of gold rises. For example, countries that specialize in producing products made with gold, but lack their own gold reserves, will be large importers of gold. Thus, they will be particularly susceptible to increases in the price of gold.
Gold and stocks are negatively correlated.
If gold price go up, stock market goes down and vice versa.When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, and thereby create an excess supply of the fiat currency. Because of high inflation people invest more in bullion and less in stocks causing the stock markets to descend.
These effects are in aggregate. If we break down the stock market into individual stocks, the gold prices have different effect on each. An increase in gold prices will cause Gold ETF’s and banking stocks to rise but other stocks might fall or remain stable.