The gold standard: gold price and hedging against inflation
Gold trading dates back to Egypt in 3100 BC. Today, it’s considered a popular hedge against inflation. Learn more about this precious metal’s relationship with inflation and how you can start trading it.
What drives the gold price?
On 30 March 2022, the gold price reached more than 1787 CHF an ounce and has increased considerably over the past 50 years. Here are the top five drivers of the gold price:
In addition, environmental factors such as inflation rates, government changes, governmental scandals, elections and wars (which create market volatility) also affect the gold price.
Value of the USD
The gold price is related to the value of the United States dollar because the metal is dollar-denominated. A stronger US dollar tends to keep the price of gold lower and more controlled, while a weaker USD will likely drive the gold price higher due to increasing demand (as more gold can be purchased when the currency is weaker).
Market volatility
During uncertain economic times, such as recession, more people tend to gravitate towards gold because of its enduring value. Described as a ‘safe haven’ for traders and investors during turbulent times, when the return on bonds, equities and real estate fall, the interest in gold positions can increase, driving up its price.
Gold production
China, South Africa, the US, Australia, Russia and Peru are major gold mining players. The world's gold production affects the price of the commodity, which is another example of supply meeting demand.
Gold mining production has not changed significantly since 2016 as the ‘easy gold’ has already been mined, therefore miners need to dig deeper to access quality gold. This brings additional problems such as leaving miners exposed to additional hazards and worsening environmental impact. Consequently, it now costs more to mine less gold. All this adds to gold mining production costs resulting in higher gold prices.
In 2021, gold demand bounced back from Covid-19-induced losses in 2020, to reach 4.02 kt.
World’s top five gold producers 20211
| 1 | Newmont, Australia | 5971 koz |
|---|---|---|
| 2 | Barrick, Canada | 4437 koz |
| 3 | Polyus, Russia | 2717 koz |
| 4 | AngloGold Ashanti, South Africa | 2472 koz |
| 5 | Gold Fields, South Africa | 2340 koz |
*koz = 1000 ounces
Reserves
Government vaults and central banks hold paper currencies and gold in reserve and when central banks diversify away from paper currencies and into gold, it results in increasing prices. Many of the world's nations have reserves that comprise primarily of this shiny commodity.
Bloomberg reports that global central banks have bought the most gold since the US abandoned the gold standard in 1971. Turkey was the largest gold purchaser in 2019 followed by Russia, Poland and China. Governments bought a total of 650 tonnes of gold in 2019, down from 656 tonnes bought the previous year.
Jewellery demand
In 2019, jewellery accounted for about half of the gold demand, which was more than 4400 tonnes. India, China and the US are significant consumers of gold for jewellery.
As a desirable commodity, gold is not only pursued for investment purposes and to make jewellery, 7.5% of demand is used for technology to manufacture electronic and medical devices such as GPS units and stents.
Investment demand – especially from exchange traded funds (ETFs) – also pushes an underlying need. Gold bar and coin investment reached an eight-year high in 2021.
Is the gold price a hedge against inflation?
The gold price is considered a hedge against inflation, as many traders and investors opt to get exposure to it to protect their capital against value erosion, which arises from an increase in general prices.
Gold prices are related to the value of the US dollar (USD) because gold is dollar denominated. Therefore, a stronger USD keeps the price of gold lower and more controlled, while a weaker USD drives the gold price higher due to increasing demand. Therefore, more gold can be purchased when the dollar is weaker.
Exposure to gold reduces the risk of an asset’s adverse price movement and consists of taking an opposite position in a related security. Gold and inflation are not only linked, but this precious metal also protects against economic events like currency devaluation and provides a safety net during periods of political instability.
The golden star: how has gold performed over the past 50 years?
Inflation is one of the most discussed economic metrics in financial markets. The line graph below shows that gold prices in the past 50 years rose in relationship to the UK’s inflation rate, which is why many individuals have chosen – and continue to choose – gold as an inflation hedge.
The golden way to hedge against inflation
Trading
- Create account or log in and go to our platform to start trading
- Search for your opportunity
- Select ‘buy’ to go long or ‘sell’ to go short
- Set your position size and take steps to manage your risk
- Open and monitor your position
How to trade or invest in gold without owning it
Traders and investors don’t typically have Fort Knox (or similar facilities) in their property portfolios; therefore many appreciate that holding heavy, gold bullion is a difficult (and costly) process.
The good news is that there are ways to trade in gold without physically holding it by trading price movements (of gold itself or gold company shares). Learn more below.
CFDs
With us, you can trade contracts for difference (CFDs) on the spot, via gold options or futures.
Steps to trading gold via CFDs
- Learn what CFD trading is
- Create and fund a CFD trading account
- Choose your gold market and timeframe
- Decide whether to buy or sell
- Set your stops and limits
- Open and monitor
The price of gold and inflation summed up
- The gold price is mainly driven by the value of the USD, market volatility, gold production, reserves, and jewellery demand
- Gold is considered a hedge against inflation, as many traders and investors opt to get exposure to it to protect their capital against value erosion
- Gold and inflation are not only linked, but this precious metal also protects against economic events like currency devaluation and provides a safety net during periods of political instability
- You can trade gold and gold stocks with us, without owning them, via CFD trading
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
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