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Factors Influencing the Gold Price

Gold prices are one of the most complicated commodities, unlike other assets, the price is relative to more than just a typical production, demand and inventory algorithm.

Even amateur investors can understand the correlation between traditional stock market data and the consequential shift in trading prices; however, because gold is effectively money, its price is also subject to additional influencers, namely:

  • Global inflation, particularly that of the U.S., which indicates a rising supply of money;
  • The ‘indirect pricing’ of production costs for other commodities;
  • Activities of central banks including printing money and their trading of gold.
  • Real interest rates (interest rates compared to wages and inflation), particularly those in the U.S.
  • Trade and growth imbalances.

In addition, influencing factors can be a combination of psychology, speculation and, to an extent, market manipulation. The costs of extracting what gold is known to be left in the earth’s crust is an expensive business as much of this precious metal is alloyed with other metals making it harder (and more costly) to extract pure gold. As a result, the production of gold is incredibly responsive to market prices; if the gold price per ounce is too low then production slows or ceases. In turn, this means less gold on the market which causes the price to rise. Live Gold Bar Prices

Price of Gold UK

The rising price of gold has been headline news in the UK for over a decade as the seemingly inexorable rise continues to match the highs of the 1980s.

From reaching a 30 year low in 2001, the gold price per ounce rose from around $360 to $1,825 in August 2011 and is currently trading at around $1,750. Historically, the price has always been subject to some volatility but with a greater understanding of this valuable commodity, investors can use market knowledge to their advantage. Knowing when to buy gold, when to hold on to gold and when to sell gold is crucial to turning a profit but just what influences the gold price.

The LBMA’s role

While the gold spot price fluctuates by the minute, the London Bullion Market Association (LBMA), provides two price fixes per day (10.30am GMT and 3 pm GMT) as reference points for the market.

The London base for the association stems from the history of the gold stocks from the various global gold rushes being refined close to the Bank of England. The Bank of England launched an approved list of producers who met the required standards in 1750, known as the London Good Delivery List, which still exists today. The LBMA carries out several other rules including setting out a code of practice for LBMA members and publishing data including the amount of gold and silver in London vaults. The most significant change recently has been with the publishing of the two daily price fixes for both gold and silver. Historically the am and ppm fix have been published minutes after the official fix. However, accusations of price manipulation by the big players who help set the price has led to changes in 2018. The LBMA now delays the publication of the daily fixes until the following working day to minimise any possible advantage of ‘fixing’ in a hope to eradicate any foul play. The actual mechanics of price determination are through two daily electronic auctions for wholesale buyers and sellers of precious metals. An in-depth explanation of the auction process can be found here.

A Market History

Over the last five years, gold prices (whether this is in gold coins or gold bars) have risen from around $1,300 (July 2017) per ounce to around $1,750 (July 2022); that’s an increase of around 35%.

At the height of the recent market, the gold price per ounce reached $2,060 (August 2020) equating to a 58% rise . Investors who chose to liquidate their assets in at the peaks of August 2011 or August 2020 would have realised a large profit on their original gold investment; but, did many choose to do so? Probably not and there is a good reason for this. Investing in gold, for many people, is not about turning immediate profits and constantly analysing markets to liquidate their assets. Gold is seen as a way of diversifying a portfolio to mitigate the risk of the kind of market exposure offered only by paper assets. For many, this kind of investment decision is about shoring up a pension or other future financial retirement annuity. Historic prices, like other commodities, have followed wider economic trends as well as geopolitical changes. Most significantly, as a form of money, gold is strongly linked to the currency markets, notably the US Dollar. A weak US Dollar is often a precursor to a higher price whilst a strong US Dollar can indicate a fall in gold prices.

Currency influence (UK vs the US)

Due to its historical link to the US Dollar, the gold price is still to this day initially quoted in USD. This is fine as a benchmark to determine how the underlying price is faring.

However, when purchasing and selling gold outside of the US, currency exchange rates come into play. For UK investors, it’s actually the price in Sterling terms that is important. This is where it gets complicated! Despite what many people say ,Britain still plays a significant role on the international stage. Its economy is still the 5th largest globally with its Gross Domestic Product (GDP) topping $3billion.

Infact, it pushed France down a position as recently as 2014. Britain also has a very established international trade network so any rise or fall in our stock markets or currency will likely impact overseas investors. So, it makes sense that the price could go up if there’s either very poor economic data out of the UK which could impact the world stage, or political instability or international disputes affecting the UK. After all, gold is a hedge against traditional fiat currencies, so it should rise when a major fiat currency falls.

However, with Britain increasingly shrinking when compared with the growth of the emerging economies such as China and India, negative news in the UK tends to have a limited impact on the $ gold price. Only when the news is more international, perhaps the UK joining the US in airstrikes in the Middle East, will the underlying price benefit.

So, Sterling can be ignored?Not at all. As a UK buyer or seller of gold, Sterling plays a huge role, but indirectly. As the Pound weakens against the Dollar, the gold price increases in the UK. That’s simply the effect of the gold price being converted at a higher rate (weaker Pound) from Dollars into Sterling. So, the general rule of thumb is, the price of gold in the UK goes up when the Pound weakens (against the Dollar) and it declines when the Sterling strengthens against the Dollar. The problem arises when bad news in the US can weaken the Dollar, pushing gold up in $ terms, but at the same time, the Dollar falls against Sterling, pulling the gold price UK back down. It’s impossible to know which factor will push or pull the hardest!

Why is Gold More Expensive than Silver?

Quite simply, gold is a much rarer metal than silver though silver is becoming more widely acknowledged as a diminishing precious metal which is causing the price of silver to rise.

Silver investment is, therefore, being adopted by many investors due to the current low entry price point coupled with the potential rate of growth. At a simple supply and demand level, gold is one of the rarest elements on our planet. It is estimated that if all of the gold ever mined was melted down and stored in one place, it would only fill one Olympic sized swimming pool. The gold price per ounce reflects this scarcity in the same way that works by artists like Da Vinci and Picasso are valued; limited in supply but high in demand.

Pricing gold coins and bars

If you want to know the price of gold coins or bars, then a few other factors have to be considered.

Here are the factors you need to consider:

  • Firstly, start by determining the spot price for gold in the currency you wish to transact. So, for example in the UK, the price may be 31,000 per ounce or 332.15 per gram. This isn’t the price at which you can buy or sell physical gold but instead acts as a benchmark to calculate the price of golds coins and bars.
  • Next, you need to convert to the size of your coin or bar. So, for a 100g gold bar, the quickest method is to multiply 332.15 per gram by 100=33,215. Or for a Sovereign coin, you can multiply 332.15 per gram by 7.32 (as this is its pure gold weight)=3235.34.
  • However, this is their spot rate equivalent. When buying coins or bars, price of gold coins there’s then a premium to add. The size of this premium will include the production and distribution cost, the dealer’s fee, the number of items you’re purchasing and finally any historical value.

Generally, production cost will be smaller as a percentage, the bigger the piece of gold, and vice versa. In other words, it’s far less significant on a 1kg gold bar worth 330k than a 5g gold bar worth (3175). Dealers also incentivise the buyer to purchase larger quantities by reducing their margin with the more that are bought. So, it’s worth trying to buy as much gold at once as possible to reduce this charge. You’ll need to do the maths on whether it’s better value to buy gold bars as 1 x 1kg or 10 x 100g. Usually, 1x1kg will be slightly cheaper but offers no flexibility for partial sales.

Finally, the age of the coins may well push up their price as they command a higher premium due to scarcity, desirability and collectability. For instance, a brand new Sovereign coin may well cost 3245, while the value of a Victorian gold Sovereign could be as high as 3310! It’s the same amount of gold, just worth different amounts (up to 30%). Old gold bars do not command a similar premium as there’s little to distinguish old bars from new.

The gold finish will also impact the price of gold coins (such as gold Britannias). Bullion finish is the cheapest finish for coins and appeals to those looking for investment value. A proof finish coin is struck up to 3 times and takes longer to produce. We describe the difference in look as comparing standard definition TV to Ultra high definition. The Proof coins have a matt portrait and shiny background, making the whole image look more 3 dimensional. This is fine for collectors, but the difference can be as high as 30%, especially as many proof coins come in presentation boxes and in limited issue. Most mainstream UK coins are produced to both finishes, so we’d recommend sticking with bullion versions to keep the gold price down, especially as dealers won’t pay you the same premium when you sell proof coins.

Currencies Which the Gold Price is Published In

The gold price is often quoted in US Dollars but is also priced in many currencies, which are summarised below:

  • Principle global currency – US Dollars
  • Australian Dollars
  • British Pounds
  • Canadian Dollars
  • Euros
  • Singapore Dollars
  • South African Rand
  • Swiss Francs
  • China – Onshore and Offshore Yuan
  • Indian Rupees
  • Japanese Yen
  • Malaysian Ringgit
  • Russian Rubles
  • New Taiwan Dollars
  • Thai Baht
  • Turkish Lira

Gold Information

Live Gold Spot Price in Sterling. Gold is one of the densest of all metals. It is a good conductor of heat and electricity. It is also soft and the most malleable and ductile of the elements; an ounce (31.1 grams; gold is weighed in troy ounces) can be beaten out to 187 square feet (about 17 square metres) in extremely thin sheets called gold leaf.

Silver Information

Live Silver Spot Price in Sterling. Silver (Ag), chemical element, a white lustrous metal valued for its decorative beauty and electrical conductivity. Silver is located in Group 11 (Ib) and Period 5 of the periodic table, between copper (Period 4) and gold (Period 6), and its physical and chemical properties are intermediate between those two metals.