Gold has been valued by mankind since time immemorial. Archaeologists estimate that the first smelting of it was performed by the Egyptians in around 3,600 BC, and it has held an enduring fascination ever since.  Used as currency, as a token of love, and as a symbol of wealth and power, it has played a central role in human society for thousands of years.

Today, we continue to prize it. Its role has developed beyond that of ornament and status symbol into that of a central investment instrument. Indeed, it is not an exaggeration to state that without gold, the markets would collapse. But what drives the price of this precious metal, keeping it at the heart of the savvy investor’s portfolio?

Here we look at exactly how and why its value fluctuates throughout the year…  

Understanding How the Price of Gold is Calculated

Before you can understand the factors that drive the gold markets, you need to understand how its value is calculated.

Once upon a time, it was the price of gold that determined the value of our currencies. Should a client enter a bank and ask for their paper money to be exchanged for its physical value in bullion, its employees were obliged to heed this request.

This changed in 1931. With the looming spectre of the ‘Great Depression’ hanging over the heads of everyone, more and more people began to request gold reserves. Banks began to run out of supplies, and thus the ‘gold standard’ had to be abandoned. 

Now that the two do not correlate, the price of gold is calculated separately. Set twice a day every day apart from Christmas Eve and New Year’s Eve, its value is decided by the London Bullion Market Association (LBMA).

The LBMA takes into account a number of factors that help to guide their decision, with supply and demand, the economic and political situation, central bank buying and selling, inflation, and interest rates being foremost among them. 

The Jewellery and Industrial Sectors

The supply and demand referred to above is largely driven by the jewellery industry, which accounts for around 54 per cent of global gold demand. As with any retail sector, periods of celebration and gift buying spur an increased desire for the precious metal.

With India, China, and the United States being the three largest consumers, festivities within these countries prompt the most significant drives to buy. This means that the lead-up to Christmas, the beginning of the Indian wedding season, Diwali, Dhanteras, and so on catalyse dramatically increased demand. 

A further 12 per cent of demand is attributable to the medical and industrial sectors, where gold is used in devices like heart stents, and precious electronics like GPS units. Should the need for these rise, whether this is due to increased funding of the health sector in a particular nation when a new budget is revealed, or because of a growing market for expensive electronics in the lead-up to Christmas, gold prices will flourish.  

Supply vs. Demand

Each of the factors mentioned above increases the demand for physical gold, as brokers like ETX Capital can attest. The reason that this escalates prices is because it tips the scales between supply and demand. 

You see, gold is a finite resource, and although we have been mining and buying it for at least 5,000 years, only so much can be produced each year. Thus, when demand increases, it begins to outweigh supply, causing its price to rise. 

This is why the most significant spike in the price of gold is usually seen in October, India’s traditional wedding season. We explained above that China, India, and America are three of its largest purchasers, and any stimulus to their jewellery markets will thus increase the worth of this precious metal. This is an example of this in action.

The result is that gold will be a particularly strong investment in the next few months. Always a useful addition to any portfolio, thanks to its enduring ‘safe haven’ properties, it could soon do a lot more for those savvy enough to understand its worth, bumping up the value of your assets by a significant degree. Why not consider investing in it today?