For some, gold is an investment and a store of wealth, for others it is the cost of fine jewelry. Many of our customers watch gold price closely to help determine when is the right time to buy or sell their gold, and as they see the price go up and d
own have questions about what some of the main factors price are.
Does Gold Price Make Any Sense?
No matter what your opinion on the precious metal, gold is an important resource in our world and plays a significant role in our global economy. Even if it doesn’t interest you from an investment or fashion standpoint, the gold price is likely something that will effect you in some way, through it’s important place as part of the world economy.
With such a difficult to understand value proposition and tremendous economic weight, many ask “why?”.
“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Warren Buffet
Warren Buffet is not a big believer in the fundamentals of the gold market. And while his point may be (mostly) true, in many countries gold has a very important role to play through deep rooted cultural traditions and as a store of wealth – both for people and their governments. It’s true that the gold price is simply the value that we assign to it, but in reality this could be argued for just about any scarce resource or capital in a free market economy.
One of the best ways of understanding the gold price is to simply think of it as a currency. The two main sinks for all the gold that is mined and reclaimed every year are is jewellery and investment, with jewellery actually being the biggest sink. A smaller share is also taken up by industrial uses: mostly in computer chips (did you know there is about $10 of gold in every iphone?) and dental applications. Since such a small percentage is used in industrial uses, it can be more useful to thinkof gold as a currency rather than a typical commodity. Most other commodities have very real and useful value as a source of energy, construction or as food, gold is quite limited in its general usefulness. Likewise, commodities tend to get used up, contributing to a certain amount of continuous demand regardless of the investment interest in it. Gold, of course is always there. Even if it ends up being used in jewelry or computer chips, you can always melt it down and reclaim it into its purest form. Gold is never really spent just stored – which is a big part of the reason it’s been so valuable for so long.
Gold as a Currency
The reason we can equate the gold price to currency is because, for a long time, it was currency. Many currencies were pegged to the price of gold, guaranteeing people who held that money that banks couldn’t just start printing money and causing hyper-inflation!
There are many economic factors influencing the gold price, but the same is true for currency.
How is Gold Price Determined?
Gold is a difficult commodity to assess since in some ways it behaved like other commodities, but in the end since it’s main uses are in jewellery and investment rather than industrial, it’s a very different beast.
Based on supply and demand data for 2018 and earlier, we would argue that the three biggest determinants of gold price are as follows:
- Investment Demand: At a core level there is a lot of prediction and speculation built into gold price. How is the US economy doing? What about the world economy? The stock market? Stock market volatility? Inflation? How the market decides to answer these questions can have a lot of money flowing into or out of gold. While investment demand does not account for the biggest share of gold bought every year, it is the most volatile and therefor the most important factor in determining the gold price – at least in the short term until opinions and outlooks change!
- Gold Mining: Every year about 75% of the new gold entering the market – around 3300 tons/year – comes from gold mines. The remainder – another 1100 tons/year – comes from Recycled gold (an industry we are a part of). High gold prices make it feasible and economical to pay for the mining and exploration costs to find new gold deposits. Mining output also trails behind gold price since it takes a lot of time and money to discover a mine mine and get it producing a significant volume of gold. Since high gold prices increase long term mining output and low prices do the opposite, mining output provides a stabilizing influence on gold prices.
- Jewellery: Global jewellery demand could almost be 2b as is probably the most underrated element when looking at what is happening with gold prices. For counties like China and India, gold has a large cultural importance and as these countries have gotten richer they have purchased a lot more gold. The rise of gold over the past 20 years and gold’s peak in 2011 and 2012 correspond very closely with the growing global demand for gold jewellery.
While nothing will compete with economic news for the day to day, week to week changes in gold price in the long term there are many factors at play. Changing fashions, jewellery demand, and the discovery and depletion of mines will continue to have massive effects on the price of gold.
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About Canada Gold: We are one of Canada’s largest gold dealers and recyclers. We buy gold to refine or resell, meaning we can always pay the most for your gold. We also sell gold bullion for between 10% and 40% less markup than other major bullion dealers. Visit one of our Calgary locations today!
Visit Gold.org for up to date statistics and information about the global gold market.