Gold plays a unique role in the financial systems of cultures worldwide. Unlike other precious metals like silver, platinum, and palladium, gold has value far beyond its industrial use.
While sectors like dentistry, electronics, and jewelry use gold in their products, there is not enough commercial demand to explain the very high price markets assign to the yellow metal.
However, the high price is no mystery. Since the beginning of civilization, humankind has viewed gold as a proxy for money and a safe-haven asset for many investment firms.
This reality has made it one of the most fascinating and misunderstood commodities. Gold pricing can be found on most trading platforms by its abbreviation: XAU.
In marketplaces, the terms spot gold and gold spot price refer to the current price at which you can purchase or sell an ounce of physical gold. Its useful to see spot gold price.
What drives the price of gold?
According to the World Gold Council, the annual volume of gold production has tripled each year since the early 1970s, while the amount of gold purchased each year has quadrupled.
The price of gold has risen from around $43 per ounce in 1972, the first year that private ownership of gold became legal again, to its price of over $1,500 today.
There are several common factors that typically move the price of gold.
- Central bank policies
- Economic data
- Demand for financial instruments that invest in gold
- Gold Supply and Demand. Output and market demand determines price levels.
When supply diminishes, prices tend to go up. Factors such as political unrest in countries with large gold mining projects or increases in mining input costs can constrain supply.
Discoveries of new gold deposits or declines in input costs can increase supply.
Ironically, one factor that consistently affects supply is the price of gold itself. When gold prices increase, mining gold becomes more profitable, so more supply comes to the market.
The opposite happens when prices decline. Similarly, changes in demand from consuming industries, traders, central banks and sovereign wealth funds can move gold prices.
The actions of central banks can have a big impact on gold prices in two ways. First, central banks make decisions to contract or grow the money supply in their countries.
These central bank decisions ultimately drive an increase in gold trading since fiat currencies for example US dollar and Euro compete with gold as a store of value and a form of money.
Central banks hold large gold reserves. The New York Federal Reserve Vault holds over 6,000 tons of gold, over 3% of all the gold in the world and a third more than Fort Knox.
As a result, their decision to accumulate or sell reserves can move the gold market.
Economic data most especially in the United States, can impact gold prices because the US dollar is generally viewed as the world’s reserve currency. Therefore weak employment and GDP numbers in many instances often result in a weaker dollar against other currencies.
Gold benefits from US dollar weakness because it is seen as a competing form of money.
Demand for financial instruments that include gold trading instruments such as exchange-traded funds (ETFs) represent an increasingly important segment of gold trading.
Most gold ETFs purchase physical gold and store it for their traders, although some ETFs trade in gold futures, options or other gold derivative products available in the market.
Demand for these instruments can impact gold prices.
Where does gold come from?
Miners extract gold from the ground on every continent except Antarctica.
The supply of above the ground gold is limited, so gold deposits are difficult to find. Plus, extracting the metal from gold mines is an expensive and time-consuming endeavor.
Interestingly, gold isn’t just in the ground. Ocean waters hold approximately 20 million tons of gold which amounts to more than has ever mined internationally.
However, each liter of seawater only contains about 13 billionths of a gram of gold. Yes, billionths. There is no getting away from the fact that gold is rare.
According to the World Gold Council, the total supply of gold in the world is around 197,576 metric tons which is more than the orbiter of NASA’s Space Shuttle.
If all of the gold that’s ever been mined were to be combined into one large cube, it would measure only 21 meters square. That’s a bit less than the length of a tennis court.
For many years, South Africa was the dominant gold producer in the world.
South Africa now struggles to maintain its position in the top 10 as geographically larger countries like China and Russia have increased their gold mining and production.
What are the main uses of gold bullions?
After mining, refiners process gold into bars, coins, or ingots called bullion for sale. Buyers then transform these gold bars into items like coins, jewellery and electronic components.
They may also store gold bars for traders. As with supply, gold market demand is also international and includes a variety of different industries and traders.
Fast-growing Asian economies, including India and China, have increased their demand for gold in recent years. Four groups comprise the major demand components for gold.
Jewellery
This industry fabricates gold into watches, rings, earrings and necklaces among other items. Jewelry manufacturers have been a mainstay of gold demand for centuries.
Technology
Gold conducts electricity and doesn’t tarnish, thus industries use gold in their products like connectors, switches, relay contacts on cell phones, CPU memory chips and motherboards.
Its used in salts to treat arthritis patients and on space vehicles to reflect radiation.
Private Investment
Wealthy individuals and various investment funds that want protection from inflation and market crises view gold as a way to preserve their hard earned wealth.
Investment demand for gold manifests itself through the purchases of gold bars, coins, and funds that invest in the precious metal as a safe haven for storing wealth.
Central banks and Sovereign Wealth Funds
Most central banks and sovereign wealth funds hold gold reserves.
Although none of the major world economies has a formal gold standard, many countries hold substantial gold reserves as a way to instill confidence in their fiat currencies.
How to keep up to date with Gold price news
Save time researching gold with our easy step-by-step guide to getting breaking news delivered right to you with a Google Alert. Go to Google Alerts. Type “gold prices” in the search box.
Choose how often you’d like to receive alert emails: as it happens; once a day; once a week. Choose the sources you want Google to search (eg, Blogs, Finance, News).
Choose the language of the content to search through and the country of the content’s origin.
Choose how many results to have delivered: all results; only the best results, based on Google’s algorithms. Enter the email address where you want to receive your alerts.
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What does 14k gold mean?
A ring made of 14k gold is 58.3% pure gold mixed with 41.7% of a more durable metal alloy – usually a mix of zinc, nickel, silver, and copper, with a plating like rhodium.
Pure gold is 24k. Without additional alloys, pure gold is soft and easily damaged.
It is also heavy and expensive. Gold prices can fluctuate at a moment’s notice. Its pricing trend since the early 1970s has been upward, but this has not been consistent.
It reached a peak in late-2011, lost roughly 40% of its value over the following four years, and has risen in the years following that. The highest price listed for gold in the modern era (since 1979) was $1,895 ($2,220 in 2020 dollars) in September 2011.
It’s very difficult to compare prices over hundreds of years, but the value of gold spiked in the late 15th century when its value was higher (in real terms) even than its recent peaks.
Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity and foreign exchange options trader for multinational banks and proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange.
