How Does Inflation Affect the Price of Gold?

Owning gold is considered a hedge against inflation, and investors will jump to purchasing gold when concerns about inflation arise. As consumer prices rise, the theory goes, gold prices increase as a safeguard.

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However, gold prices are influenced because of a variety of issues.

• The value of the U.S. dollar plays an important role, Lear Capital notes. A weak dollar increases the price of gold while a strong dollar may decrease its value.
• Central banks affect the price of gold when managing monetary policy or setting interest rates. This is often done as a means to control inflation, so inflation can also affect the price of gold indirectly.
• Low gold prices in general indicate a stable economy, according to the Balance. Investors usually see gold as protection from economic crises, including inflation. A strong economy allows traders to put more money into such investments as stocks and bonds instead of gold.

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• Supply and demand affects the price of gold. Most gold goes into the production of jewelry and for use in the industrial or dental industries. The rest of the supply is used for physical metals such as bullion or coins, which investors may use for financial protection.
• During the inflationary 1970s, investors flooded the gold market, increasing its value until 1982 when prices began dropping and then remained stagnant for the next two decades.
• However, inflation doesn’t always drive the price of gold, Investopedia points out. The value may rise and fall during good and bad economic times. Gold prices were rising before the financial meltdown and housing bust led to the Great Recession of 2008. Gold prices began falling at the time and then came back, peaking in 2011 while the economy recovered.

The price of gold might actually be the result of the number of investors who buy gold at a particular time. The price simply goes up as more people buy gold. Inflation fears can factor into the reasons for a run to gold, but the price is usually determined by supply and demand. When the demand decreases, the value of gold goes down.

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