As human civilization progressed and moved into a monetary transaction phase the barter system had become problematic to use. There was a need to have something new which could be used for day to day transactions.
After a while, everyone settled on gold to use as the means of transaction. This shiny metal was liked by everyone and they put their faith in it. With the passage of time, it was getting difficult to transport people’s wealth in gold from one place to another. Looting was a common occurrence at the time. People decided to deposit their gold with someone and in return, the guard would issue a certificate, which was later termed as fiat currency.
Price of gold always gets affected by one economic rule - the rule of demand and supply. Higher the demand, higher the price and plenty of supply would result in lower price. From and ancient times, gold still holds its value. People still have trust in it, that is the reason why it is still valuable and not considered as a shiny piece of metal.
But as we have developed as a civilization, more and more factors start to affect the demand for gold. Few of them being gold bought in the form of jewellery; it's used in technology because of its high electrical conductive properties, and many more.
Among many, one of the major factors in today’s world which is affecting the price of gold is inflation. Inflation is a general increase in prices and fall in the purchasing value of money. Inflation is caused by many things a few are:
1. Cut in interest rate: When the central bank decides to decrease the base point in interest rate, it makes taking out loan cheaper than any other source of fund. This will add more money to the economy. When everyone is left with more money, they can demand more of the existing things. With the limited supply, it put pressure on the supply side and price starts to rise. When you were able to buy more with your money, you need more of it to buy the same amount of products. In short, your purchasing power has gone down.
2. Increase in money supply: Sometimes due to some conditions, the central bank decides to print out more money. This money is then pushed into the economy. In this situation, the economy is having more than it needs. People will start to get more in terms of money and demand more of the existing goods which increases the price and lower downs the purchasing power of the money in hand.
3. High Wages: When the economy is growing and everyone is making money people will get a good amount of wages. When they have extra money they never had, their demand for existing goods increases. This is an increase in demand to push the prices up and diminishes the purchasing power of the currency which gives birth to inflation.
4. Currency Devaluation: In international trade, we pay a certain amount of money to get an item. When the price of that product goes up in the international market, we need to pay more to get the same quantity of product. Now, the end consumer needs to pay more to get the same quantity. This devaluation in currency has diminished the purchasing power of the currency.
Today’s time is more sophisticated than before. The gold which once had one purpose, to be money, is now seen as an asset. In these risky times, big investment banks, huge fund manager’s wants to lower down their risk. When the inflation starts to rise or there is a general sentiment that the inflation will go up, the managers and the general public convert their fiat currency into gold to secure them against the rising inflation. Inflation will only devalue the fiat currency but gold always holds its value. Fund manager’s starts to buy the gold which increases the demand hence the price is pushed up.
High gold price in current time.
To lower the blow of COVID-19 on the economy; US Fed and Bank of Japan printed money to buy the bonds of the companies to keep them afloat which in turn increased the money supply in the economy. Fund managers fear that this money printing will increase inflation and to secure them from this inflation, they are buying gold. If everything works out perfectly, without triggering the inflation, the gold bought by fund managers, will be sold eventually, which will increase the supply in the international market leading to a decline in price.