In the interconnected global economy, different assets often have influence over one another. Gold is an example of an important historical and resilient asset that is connected and influenced by economic factors.

One such factor that plays a pivotal role in gold prices is the changing tide of commodity prices. The ups and downs in commodity prices, ranging from oil and metals to agricultural products, have a big say in what happens to gold.

Gold is often considered a commodity itself. Yet it also functions as a form of currency, investment, and a store of value. This is why it’s important for investors to know the economic elements that influence gold's value.

In this article we’ll walk through how changes in commodity prices shake up the value of gold. This affects not just markets but also the choices of where people invest their money. From dealing with inflation to the basic dynamics of supply and demand, here are the ties between gold and commodities and how they impact your investments.

1. Inflation

Gold has long been considered a hedge against inflation. Moreover, commodity prices are often sensitive to inflationary pressures. When inflation rises, the purchasing power of currencies declines. That prompts investors to seek refuge in tangible assets like gold as a safety net from inflation.

Consequently, increasing commodity prices can be indicative of inflation. This tends to drive up demand for gold, pushing its price higher. Other commodities can also be viewed similarly during inflationary periods.

chart showing the loss of currency purchasing power over time

Compared to gold historically, fiat currencies always lose their purchasing power.

Inflation erodes the purchasing power of currencies over time. As commodity prices rise, it can signal increasing production costs and, therefore, inflationary pressures. Gold, with its intrinsic value and limited supply, is often sought as a hedge against inflation. Investors turn to gold to preserve their wealth when traditional currencies face the risk of devaluation.

2. Economic/Market Sentiment

Both gold and other commodities can be influenced by broader market sentiment. Economic uncertainty or geopolitical instability may lead investors to seek safe-haven assets like gold. Similarly, commodities may see price fluctuations based on global economic conditions and demand.

Commodity prices are often viewed as a barometer for the overall health of the global economy. Fluctuations in commodity prices can be caused by:

  • Economic uncertainties
  • Geopolitical tensions
  • Financial crises
  • Gold, as a safe-haven asset, tends to attract investors during times of economic uncertainty. Therefore, when commodity prices experience volatility due to external factors, it can influence investors to flock to gold as a reliable store of value.

    Commodity prices are closely linked to the health of the global economy. As a result, the factors listed above can create volatility in commodity markets. Gold, being a safe-haven asset, tends to thrive in times of economic uncertainty or crisis.

    Investors seek the stability and security that gold offers. This leads to increased demand and upward pressure on its price when commodity markets experience turbulence.

    3. Currency Exchange Rates

    Gold is traded globally, and its price is denominated in various currencies. Changes in commodity prices can impact currency exchange rates. These fluctuations, in turn, influence the price of gold.

    For instance, if a major commodity-producing country experiences a surge in prices, it may strengthen its currency. Conversely, a weaker currency in the face of rising commodity prices can make gold more attractive to investors in that region. This currency-driven demand can impact the overall global demand for gold, affecting its price.

    4. Interest Rates

    Changes in interest rates can impact the opportunity cost of holding gold. When interest rates are high, non-interest-bearing assets like gold may be less attractive. This relationship can extend to other commodities as well. Commodity prices are sensitive to interest rates because they affect the cost of financing for producers. When interest rates rise, the cost of holding non-interest-bearing assets like gold increases.

    This higher opportunity cost may lead some investors to shift towards interest-bearing assets. That potentially decreases the demand for gold and puts downward pressure on its price. By contrast, lower interest rates may make gold more attractive as the opportunity cost diminishes.

    5. Supply and Demand

    The prices of both gold and other commodities are influenced by supply and demand factors. Supply and demand affects the trading dynamics of commodities and products all over the world. Economic growth can increase demand for various commodities. Conversely, disruptions in supply can lead to price fluctuations.

    Many commodities share common factors such as mining and extraction processes. Changes in commodity prices can impact the cost of production for gold mining companies. If the cost of extracting gold becomes prohibitively high due to soaring commodity prices, the supply of gold may decrease. With the principle of supply and demand at play, a decrease in the supply of gold can contribute to an increase in its price.

    Central banks around the world hold significant amounts of gold. If they decide to buy or sell gold, it can have a substantial impact on the overall supply. If central banks increase their gold reserves, it can create positive sentiment and confidence in the market, likely leading to an increase in the demand for gold. This increased demand, in turn, may drive up the price of gold.

    On the flip side, if central banks sell off their gold reserves, it floods the market with supply. This will possibly lead to a decrease in the value of gold. That's why it can be valuable for investors to monitor central bank activities and announcements regarding gold reserves.

    photograph of gold bars stacked in the Bank of England vault

    Gold bars held as reserves in the vault of the Bank of England.

    Takeaway: Gold Has a Unique Relationship to Commodity Markets

    In financial markets, commodity prices and gold are interconnected. With inflation hedging, supply and demand dynamics, global economic sentiment, currency exchange rates, and the influence of interest rates, it becomes clear that gold's value is a reflection of the broader economic landscape.

    These elements together each play their own role in the rise and fall of gold prices. Changes between gold and other commodities shows how the slightest ripple in one market sends waves through other assets. This is helpful to know when shaping an investment portfolio to weather tough economic times.

    Written by Paulina Likos

    Learn more about investing in commodities and precious metals from the author:

    How Precious Metals Have Performed So Far In 2023

    7 Best Safe Long-Term Investments

    5 Safe Investments During a Recession

    7 Good Investments For Beginners

    12 Best Investing Tips For Beginner Investors

    Posted In: blog
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