Gold Price: How events in China and Greece have contributed to a five-year low - and what it means for you

Gold is now the cheapest it’s been for more than five years

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The Independent Online

What’s happened to the price of gold?

Gold is now the cheapest it’s been for more than five years.

You can buy an ounce of gold for $1,088 (£697) – a drop of 4 per cent.

This is the first time gold has traded below $1100 since March 2010.

Some analysts are predicting that the price of gold will fall below $1000 an ounce by the end of the year.

Why?

Gold is getting cheaper because people are choosing to invest in assets that might increase in value – like currency.

Janet Yellen, the chair of the US Federal Reserve, said that interest rates might rise by the end of the year. This gives people confidence that the US economy is going to continue to improve – and that the dollar is going to strengthen with it.

Meanwhile the promise of a third Greek bailout gave investors more confidence in the euro and the European economy.

The latest drop in the gold price was also affected by Chinese investors selling a lot of gold. On Friday, China said its gold reserves are 57 per cent higher than they were six years ago. Some analysts said that gold investors might have realised China would not be buying up a lot more gold. You can only make money from gold by selling it on. So if China, the world's biggest consumer of gold, already has a lot more gold than it once did, it might be harder to sell on your investment.

The price of gold has been falling since 2011

Why do people invest in gold in the first place?

Gold is seen as a safe investment during times of economic uncertainty. In fact, the price of gold can be very fickle – its value has been falling ever since it hit its last peak in 2011.

During times of high inflation, when prices are rising and the amount you can get for your money is decreasing, gold is attractive because gold can hold its value better than other assets. Gold is also attractive when there are low interest rates because it can offer a better return than savings accounts or bonds.

After the financial crisis in 2008, the US government intervened to stop the country’s economy from going into a recession. It started buying bonds to try and drive down long term interest rates and encourage companies to borrow money and invest in growth. This programme ended in October 2014, but the Federal Reserve kept interest rates near zero, to prop up the economy.

Now Yellen has suggested interest rates might rise in the near future, as has Mark Carney, governor of the Bank of England. Investors are shifting their money out of gold and into currencies so they can make money as prices rise.

Who is affected?

If the price of gold falls, countries that have bought a lot of gold will be affected.

Russia, Turkey, Azerbaijan, and Kazakhstan all boosted their gold holdings in March this year, only to watch gold's price slump ever since.

Mining companies also suffer when the price of gold falls. Australian gold miners Evolution Mining saw their share price drop more than 13 per cent in early trade on Monday, while Regis Resources, Northern Star Resources and Newcrest Mining were all down by more than 8 per cent, according to the BBC.

How does that affect me?

If you have invested in gold – like the central banks of Russia, Turkey, Azerbaijan, and Kazakhstan – your investments will be worth considerably less than they were five years ago.

Gold used to be seen as a very reliable economic indicator, especially for inflation. In the last 15 years, the price of gold has not matched trends in inflation. But dramatic changes in the price of gold can tell us that the global economy is changing in some way. We might expect other changes, such as interest rate rises, which could adversely affect people who have borrowed money.