Gold Prices as It Relates to the Global Economy

Gold is often used to hedge against inflation or used as a measure of the US dollar. Gold coins are seen to impact the US economy in terms of the stock market, inflation and the US GDP.

Gold is not just for the American’s investment portfolio as statistics show only an 11% demand in America between 2004 and 2008 whereas the rest of the world accounts for the balance. Gold demand for jewelry is 68% globally with at least 50% from China, Middle East and Turkey. Gold in other forms, like bars or coins, gives 20% by US, Europe and India. Japan demands 12% for industrialization.

One cannot just correlate gold to the US economy only, for inflation, velocity of money and the supply of money affect the whole world with gold in the forefront. The demand of gold by the big players will give a better understanding of how gold prices will move in the future.

Gold and Money Supply

Historically, gold has proven to be quite stable during adverse or favorable market conditions. But there are important correlations that can affect gold prices and its trend over the short and long terms.

Foremost in the correlations is the dollar; it seems to correlate negatively to gold which means an increase in the dollar value shows a decrease in gold prices. Nevertheless, gold has proven to be the better performer over stocks and bonds during inflation or economic crisis, as seen in 2007 when gold prices increased. Currently gold prices have kept increasing for 9 consecutive years since 2001.

Hence, one measure from the monetary policies is to increase the supply of money to stimulate the economy. But when liquidity is increased, the chances of inflation also increase. Global economies face this major issue fearfully as it is impossible to predict the intensity of inflation.

In reality, gold prices move in its own momentum despite the supply of money factor. Good economic growth will see more wealth with more demand in gold whereas an economic recession will have gold considered an asset and a hedge against inflation as well as the lowered worth of paper currencies. The value of gold has never dropped to zero due to its demand at all times.

While the economy changes unpredictably, understanding gold better in relation to monetary policies will help you decide that it is a great time to buy gold.