How Do Gold Prices Effect the Economy?

By Collin Fitzsimmons
Gold Prices, How Do Gold Prices Effect, the Economy

Gold Prices and Currency

Gold prices used to be very important for the purpose of monetary policy, as before the nations of the world dropped the gold standard, gold was used to back up the value of a nation's currency. Today, most currencies have long since abandoned this type of currency, one backed by some form of commodity, and have since issued money backed only by itself. For example, today America still has some gold reserves in places like Fort Knox, but not near enough that any significant percentage of our paper money is backed by gold. This type of unbacked currency is known as fiat currency. This means that as of today, gold prices act basically like any other luxury commodity, and has only a small bearing on the economy.

Gold, Mining and the Jewelry Market

There have been developments in the gold industry, thanks to the fluctuating prices beginning in 2006. Gold prices rose from under $500/g to close to $1,000/g in the next three years, finally pausing to hover around $900. This prompted a rise in the cost-effectiveness of the refining process, encouraging the formation of several companies that buy back gold from consumers and resell it into the metals market. This may have been a result of increasing costs in South Africa's gold mines due to costs of extraction and tightened safety regulations.

Price of Gold

Pricing of gold is determined on the open market by London gold fixing. The five principle members of the London gold pool set a price for gold for settling contracts between the members of the bullion market, but this price is publicized and used informally as a benchmark to price gold worldwide. In the long-term, since 2001 gold has more than tripled in value against the U.S. dollar, leading to speculation that commodities markets were again going to be bullish. However, the price of gold is not a completely segmented industry, not related to monetary policy, and comprised only of gold's luxury and industrial applications. Gold prices no longer have significant effects on the economy outside of industry-specific issues.

About the Author

Collin Fitzsimmons has been writing professionally since 2007, specializing in finance and the stock market. He serves as a financial analyst at AMF Bowling Centers, Inc. Fitzsimmons earned a bachelor's degree in economics from the University of Virginia.