Gold Determinants

Long-Run Determinants of the Price of Gold

Whether investors in any particular country gain or lose by holding gold depends on the start date when gold is purchased and the length of the holding period. More specifically, it is far more likely to be profitable to invest in gold when the nominal price of gold is below its inflation hedge price. Conversely, it more likely to be unprofitable to invest in gold when the nominal gold price is above its inflation hedge price.

The dollar depreciation will lower the price of gold to investors outside of the USA, and this will raise their demand for gold and raise the US dollar price of gold. That is in addition to the long-run relationship between the US price level and the price of gold. The dollar depreciation will likely raise US inflation rates, and gold would act as an inflation hedge during this period.”

While gold is/will be an important anti-inflation hedge and against US-dollar devaluation, if the investor is from a country whose currency is expected to appreciated strongly against the dollar than gold may not be that great a buy.