Gold Prices - Reflection on Economy

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 Many investors believe that changes in Gold prices can have an impact on the economy. It is typical to note that Gold prices reflects economy rather than causing them. Gold prices reflects changes in the value of Dollars compared to other foreign currencies.

In 1792, USA established fixed price of Gold in terms of Dollars. Gold and Silver became the legal tender in USA as the Spanish Rial (a silver coin) of Spanish empire. U.S. mint legally required to buy & sell Gold & Silver at the rate of 15 parts of Silver to 1 part of Gold.

When Dollar is strong, it reflects (even if Gold prices remains same) Gold will be expensive in foreign countries whose currencies have declined in value. This tends to cut demand and put pressure
on Gold prices pushing them down in Dollar terms.
The opposite is true when Dollar weakens, because of falling prices in foreign currency makes Gold cheaper to purchase, thus raising demand and pushing Gold prices upward.
When economy weakens, it draws more money toward what are perceived to be stable investments e.g. Gold or Cash.

Low interest rates makes easier to choose Gold as an alternative to Bonds and like other
investments because they pay little income besides carrying risk of decreases in value when rates
rise. To compare, higher interest rates makes bonds more attractive compared to non- income producing assets like Gold. The high borrowing cost for investors who take loans to buy Gold
also make demand for Gold dry up more quickly.

Inflation threatens value of financial assets like stock and Bonds. It makes Gold more attractive
as a stock of value. Since inflation occurs at times of economic unrest, many look to Gold as safe investment. But it pushes up prices of Gold due to increase in demand.

Nevertheless, understanding some of the perceived fundamentals of how Gold market work can help in investing effectively.         

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