What is the reason that the rate of gold goes up and down? Firstly it is caused by the personal and industrial demand; the second is the central banks and major mining companies; and the third is caused by the speculators and traders, and the lastly is war and national emergency.
1). The personal and industrial demands
The biggest factor that influence the gold price is the demand for jewelry, which consumes two-thirds of annual gold production. Industrial demand accounts for around 12% of gold demands. This includes the medicine using. Gold is a popular ingredient in the industry because it has a high thermal conductivity and high resistance to corrosion. The demand for jewelry and idustrial increase for many years as the population grows. A further increase to gold demand comes from the emerging countries (India, China, Middle East, etc.), that become more industrial and its citizens wealthier.
2). Central bank
The market participants with large gold reserves, such as central banks and mining companies influence the gold price significantly. To reduce the level of gold prices, gold sis old (to provoke a short sale). To increase the price, the gold is either production or sold is be improved.
However, the central banks hold less gold reserves than is generally assumed. In 2010 only 16% of the produced gold is possessed by the central bank. In addition, the Washington Agreement on Gold (WAG) from 1999 put a cap on the sales of gold by its members (the United States, Japan, Europe, Australia, the Bank of International Settlements and the International Monetary Fund). This agreement restrict the sale to less than 500 tons per year.
Beside influencing the gold price by means of selling and buying, the central bank also has a power over the price by changing the interest rates. High interest rates make investment in gold is less favourable.
3). The speculation and trading
As we know, gold is not only in demand for further processing (industry) or as accesories to showing off (jewelry), but also for speculative motives. This is the same as other commodities such as oil, wheat and copper. Gold can be used to hedge against inflation and devaluation of currencies. So, gold in a portfolio eases the loss. Also, the price is negatively correlated to the U.S. dollar value. That means if the dollar weakens, then the gold price will rise. Other speculative actions are futures and options where the investors can get benefit from falling prices of this precious material.
4). War and national emergency
The last factor that influences the price of gold is the national emergencies and crooks in the government. The war can reduce the gold purchases cause people have less disposable income, and perhaps other priorities (eg, for survival). On the other hand, in such extreme situation gold may bring a stable value into the portfolio, as the national currency tends to suffer. Think of the hyperinflation in the 1920s in Europe, or the current situation in Zimbabwe. Another issues are dictators who nationalize the gold mines, limit the exports or steal the supplies from the central bank.