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Approach to Gold Valuation

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    Gold Valuation : How to Value Gold

    Gold Valuation: The value of paper currencies has changed over the years, but this is not so with gold which has maintained its value for years. Many traditions and cultures focus more on the beauty of gold and, as such, hold it in high esteem to be an element of wealth but dont understand how gold valuation works.

    This is not so with investors. Investors buy gold to prevent inflation of their paper currencies, diversify their portfolios, and a means preventing their money from being devalued. Investing in gold is good, but not everyone knows how the prices of gold are derived nor what affects its prices daily. There gold valuation become very important for investors

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    How Is Gold Priced?

    The gold rush in 1697 moved gold from Brazil to London, and since then, London has had a hand at the gold price. London Good Delivery List, which is the only accreditation bullion market globally, is managed by the London Bullion Market Association. A process known as “London Gold Fix” is used to set the prices of gold by the five countries that operate the London Gold Market Fixing Company.

    Two models are used primarily by traders to know the gold valuation. They are:

    • Gold futures price
    • Gold spot price

    Gold Futures Price

    Gold futures prices are used for the London Bullion Market Association (LBMA) gold price. There are many factors upon which the gold futures contract price is determined. They include the estimated cost in storing and moving the physical gold, the predicted changes in the demand and supply of the precious metal, the spot price of gold, and the risk-free return rate of those holding the gold. These trades are electronic as the physical gold is not delivered immediately after purchase. They are very risky since the demand and supply factors are unpredictable.

    Gold Spot Price

    A spot price is the price of gold meant to be delivered as soon as possible. Futures prices are always higher than the spot price of gold in a stock market. However, when physical gold is much demanded, the reverse is the case. That is, the futures price becomes lower than the spot price.

    Other factors that influence the gold valuation

    Apart from the LBMA prices, other factors affect the prices of gold. The three major external factors that contribute significantly to gold prices are:

    1. Market Conditions
    Both economic and political events distort the market conditions. When this happens, gold prices are influenced.

    2. Supply and Demand
    Supply and demand are the main factors that change every commodity’s prices. The prices of gold will go high when there is high demand for gold with a low supply of precious metals. The prices of gold will be low when there is insufficient demand but high supply.

    3. Currency Depreciation
    Currency depreciation takes place when a country’s currency loses its value compared to other foreign currencies. The significant causes of currency depreciation are monetary policy like quantitative easing and inflation. Investors will see the gold purchase as an escape when a country’s currency is weak. This will increase the demand and prices of gold.