The Significance of Changes in the Price of Gold
If you’ve ever been exposed to even one commercial on a financial TV network, you’ve been told that gold was, is, and forever will be the greatest investment of all time, considering its retention of value, millennia-long history, scarcity, and other reasons.
However, the companies selling gold will gladly take your cash in exchange for it, which ought to tell you something about gold’s short-term prognosis.
Key Takeaways
- While gold is often seen as a safe haven investment and store of value, it is also a produced commodity and subject to those same economic forces.
- When gold miners produce an excess of gold relative to demand, the price will experience downward pressure due to the laws of economics.
- Speculators that accumulate or let go of gold in the market can create temporary imbalances that lead to rapid price changes.
Understanding Gold Prices
A permanent bull market for gold is impossible. If the price of gold had risen consistently and measurably in value since the days of Tutankhamun, its price would now be infinite. The metal’s price clearly rises and falls, so what makes one day’s supply and demand intersect at one price, then the next day at another?
Indeed, the price of gold has fluctuated throughout history, reaching an all-time high of just under $2,075 per troy ounce during August 2020 as the COVID-19 pandemic sent investors searching for safe havens and a store of value. Since then, the price of gold has come off a bit from its all-time highs but has remained fairly strong, even as the stock and bond markets have experienced downturns through 2022.
$2,072
The all-time high price for an ounce of gold, observed in August 2020 amid the global COVID-19 pandemic.
Surge in Supply
The supply of gold is largely static from one period to the next. Gold mines are large and plentiful, but almost the entirety of what they produce is wasted. As technology improves, ore with lower concentrations of gold becomes more economically feasible to mine. Discard all the billions of tons of worthless ground rock, and it has been estimated that all the gold discovered thus far would fit in a cube that is 23meters wide on everyside.
As a long-standing commodity, gold is not a security for the speculative. No one, or at least no one sane, buys physical gold in the hope that it will sextuple in value over the next year. Instead, buying gold is a defensive measure: a guard against inflation, currency devaluation, the failure of less tangible assets, and other woes.
Unlike many other commodities—light sweet crude oil, ethanol, cotton—precious metals differ in that, for the most part, they are not consumed. Less than 10% of gold is mined for technology/industrial purposes (e.g., rheumatoid arthritis drugs and dental bridges), leaving the rest to be held and later sold at the buyer’s will, whether in bullion, coin, or jewelry form. Fundamentally, the total supply of gold is more or less static.
In 2009, Aaron Regent, then president of Barrick Gold Corp.,the world’s second-largest gold producer, stated that gold production had peaked at the turn of the millennium and would continue to fall. Prices did, indeed, correspondingly rise until late 2011. In fact, they doubled. Yet, in today’s prices, they’ve lost 15% since that all-time zenith.
Gold’s most pronounced price fall in the past decade happened from October 2012 to July 2013—nine months during which the metal lost over a quarter of its value. The price continued to fall to a low of $1,054 per ounce in December 2015 before rebounding. As of January 2023, the price was more than $1,900 per ounce.
It is worth noting that gold mining comes with environmental costs. As technology improves, more environmentally friendly ways of extracting gold (such as using bacteria to mine) can be adopted. These methods reduce the environmental footprint of more traditional methods.
Market Conditions
Speculation is one reason for changes in gold prices. Investors speculate as to what governments and central banks are going to do and then act accordingly. Gold prices dropped when the Federal Reserve announced in 2014 that it was wrapping up its stimulus program after the financial crisis of 2008.
That announcement, coupled with the preternaturally low inflation rates of the time, rendered gold’s role as a hedge against rising price levels moot. Throw a red-hot stock market into the mix, and the temptation for increasing returns contrasted with maintaining one’s store of value becomes too great. Why sit on the sidelines with an inert shiny metal when other investors are getting at least temporarily rich?
In the late 1990s, gold was hovering in the $360 range. That’s per ounce, not per milligram. People who have been shrewd and patient enough to hold onto their gold stashes throughout terrorism, war, prolonged recession(s), and other assorted global upheaval are justifiably proud—and probably still not selling—particularly when you consider that worldwide economic and political distress are often the norm, not the exception.
What are the main reasons why gold prices may experience a fall in value?
The reasons why gold prices may experience a fall in value include an excess of supply relative to demand and shifts in investor sentiment. A strong dollar and rising interest rates can also hurt the price of gold, as can low inflation. When the economy is healthy and growing, stocks and other investments may become more appealing to investors, who may sell their gold holdings, which can lead to a fall in gold prices.
Can gold prices continue to rise forever?
Probably not, but it may continue to trend upward over the long run, interrupted by pullbacks and bear markets. It’s important to note that gold prices have historically been volatile and have fluctuated quite a bit over time. The price of gold, like any other commodity, is subject to the laws of supply and demand. When the supply of gold is low and demand is high, the price will rise. Conversely, when the supply of gold is high and demand is low, the price will fall. Additionally, other factors like interest rates, inflation, currency value, geopolitical events, and economic conditions can have an impact on gold prices.
What is the role of mining technology in the supply of gold?
Improvements in mining technology can affect the supply of gold by making it more economically feasible to mine lower-grade ore with lower concentrations of gold, thus increasing its supply. As mining technology improves, it becomes possible to extract gold from previously uneconomical deposits. Also, technological advances can improve the efficiency of existing mines, which can lead to increased production of gold.
For example, cyanide leaching, heap leaching, and bioleaching are some of the technologies that have been used to extract gold from low-grade ore. These technologies can extract gold more efficiently and at a lower cost than traditional mining methods.
What is the main use for gold?
While a small proportion of gold is used for industrial purposes or in electronics, the majority of the stuff is held and later sold for uses such as bullion, coins, or jewelry.
The Bottom Line
Gold is often seen as a safe haven investment and a store of value, but as a produced commodity, it is also subject to economic forces like supply and demand. When gold miners produce an excess of gold relative to demand, the price will experience downward pressure. Additionally, speculation and shifts in investor sentiment can cause rapid changes in the price of gold.
Despite the volatility, gold remains a popular choice as a store of value and a hedge against inflation and currency devaluation.
It’s tempting to think that gold represents an objective, unswayable measure of wealth, particularly given the metal’s role as an investment throughout the course of civilization. However, it is not. Gold’s value rises and falls just like any other investment.
While gold will almost certainly never gain or lose relative value as quickly as penny stocks and dot-com initial public offerings, gold’s price movements can still convey information. That information reflects investor confidence, the probability of stock price and currency increases, expectations for rising inflation, and more. A wise investor is one who recognizes gold’s place in the market,without attaching too much or too little significance to it.
