Gold is a natural element that is non-renewable and limited.
It is often used to symbolise wealth. The value of gold has escalated over the years. Gold is special in the sense that it is actually the true currency.
Price is closely related to demand. The higher is the demand, the higher the price will be.
So, what determines the demand for gold?
Factors
influencing the demand of gold include level of income.
The higher
the level of income, the higher is their purchasing power.
They not only purchase gold for jewelleries and gold-made accessories, but they also invest in gold. This is because they expect that the future price of gold will increase. They can gain profits from this investment but there are risks in it. People invest because gold has a good record of being a good investment alternative since the price of gold has multiplied over the years.
Therefore, this increases the
demand for gold, hence shifting the demand curve to the right.
They not only purchase gold for jewelleries and gold-made accessories, but they also invest in gold. This is because they expect that the future price of gold will increase. They can gain profits from this investment but there are risks in it. People invest because gold has a good record of being a good investment alternative since the price of gold has multiplied over the years.
The other factors affecting the demand of gold include the economic situation.
When the economy is experiencing a recession or during
times of inflation, the demand for gold will increase. This is due to
fear that their currency’s value will depreciate. Therefore, gold
will act as a protection against such risk. Besides, political
instability and social turmoil such as political power struggle,
public demonstrations, or times of emergencies and wars will lead to
a higher demand for gold for the same reason.
These reasons will
result in a rightward shift of the demand curve. As a consequence,
the equilibrium price of gold will increase.
From
the graph, the equilibrium price has increased from the blue spot to
the purple spot.
The price of gold is also closely related to the US dollar.
There is an inverse relationship between gold price and value of US dollar. When the value of the US dollar drops, gold price will increase. This is because the exchange rate of Ringgit Malaysia and US dollar decrease.
As a conclusion, the
price of gold is determined by its demand. This applies not only to
gold, but also other goods and products. This is in compliance to the
Law of Demand.
Reference:
http://mcxniftycalls.hubpages.com/hub/Gold-and-Dollar-Relationship-What-is-the-Effect-of-US-Dollar-Index-on-Gold-and-Silver-Price
Lim Foong Kien (0315622)
Written by:
Michael Yeo (0314238)Lim Foong Kien (0315622)
nice relationship between US and gold !
ReplyDeleteWill the price of gold affect people who like to buy gold?
ReplyDeleteYes definitely. According to the Law of Demand, people will have a higher demand for gold when gold prices falls and vice-versa.
Deletewill it affect gold related industries?
DeleteI ask from a relative of this industry. Yes, it will. From what he told me, the recent drop of price in gold has incurred a higher demand for gold accessories. Retailers are increasing their orders for gold to be produced into gold accessories. However, factories are unable to meet all of the orders in time. Hence, some of these orders had been cancelled or delayed. They also hire more workers to meet the demand. They are also increasing workers' wages. This affects the cost of production of manufacturers. Hence, the gold production process will be more costly.
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DeleteYou are most welcome! Glad that you've learned something! :D
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