Many people invest in gold because of its history. The world saw the price of gold skyrocket in the early 2000s and the late 2010s after decades of stagnation. As such, potential investors saw gold as an excellent investment that would continue to increase in value indefinitely.
Most people realize that gold will always have some value. Gold can be a great way to diversify investments, protect against inflation, and provide security in the case of a global crisis. While gold will likely always hold some value, the price of it does change often. In general, the best plan includes buying gold when the price falls since history shows us that the price will rise again, though there is no guarantee.
If you own a considerable amount of gold as an investment, you need to keep track of the price of gold. Understanding the major factors that affect the price of gold proves a great way to do this. Just keep in mind that history tells us that the value of gold will recover if it falls.
As with any investment, people tend to sell when prices drop because of fear. If you remain calm and hold your investments even when prices decrease, then you will enjoy success when the prices eventually recover.
Factors That Affect the Price of Gold
Just like any commodity that holds value in this world, the price of gold fluctuates all the time. A variety of economic influences all working together cause this fluctuation. Each of the following factors has some effect on the price of gold.
At times, one factor may cause more of an impact than others. At the end of the day, it would be a good idea to track each of these factors if you want to understand the changes in the value of gold or try to predict the future price.
Inflation
Economic experts claim that inflation and the value of the United States dollar do not directly correlate with the price of gold. Despite this, many people choose to invest in gold when inflation is high and the economy doesn’t look good. In the past, the price of gold did rise when the economy wasn’t doing well, like in the late 2000s.
While this information may make it seem like inflation and gold have a causational relationship, it is not necessarily true. You can see this exemplified by the fact that the price of gold continued to rise as the economy recovered after the Great Recession.
Nevertheless, many people do choose to invest in gold when the economy struggles because, in the past, the price has risen or remained the same during poor economic times. However, statistics do not verify this pattern, so it should not be counted on. The price of gold has also decreased during times of economic turmoil.
In general, a best practice includes not basing your decision to buy gold solely on inflation or the value of the dollar. Instead, you can use it as one indicator while also considering other factors. During a recession, you will see many people rushing to buy gold. Be smart, and only invest when you have multiple indicators showing that the price will likely increase.
Income
While there no statistical correlation between inflation and the price of gold exists, one between income and the price of gold does. However, many people don’t discuss this relationship as much as the connection to inflation because it can’t be used as easily to get rich. Some individuals rush to buy gold in times of a recession because they think they will get rich when the price of gold rises during the economic turmoil.
The relationship between income and the cost of gold is one to one. In general, when the income per capita in the United States increases by one percent, the price of gold increases by one percent.
Supply
Supply remains one issue that affects the price of gold and will continue to affect it long-term. Estimates reveal that most of the gold in the world has been discovered, but mines continue to operate every day. While no significant amount of gold enters the market each year, the number of people wanting to buy gold steadily increases.
Because of this low supply, the price of gold surges. The scarcity of the product makes it inherently more valuable. On top of this scarcity, a significant number of people purchase gold jewelry each year, where it usually sits in a drawer for years, unlikely to re-eventer the market. This jewelry production affects the supply but also relates to the demand factor, which we will discuss in the next section.
When gold jewelry remains unworn or stored as a treasured family possession, it is simply taken out of the market, thereby decreasing the global supply of gold even further.
Demand
A few different sources control the demand for gold. The first stems from people and industries using and purchasing gold because of its intrinsic value. Since we know that gold forms the basis of much of the jewelry created, the jewelry industry stands as a primary purchaser of gold. Gold is also used in technology and industry as various pieces of technology require small pieces of gold for the manufacturing process, so these sectors purchase a large amount of gold.
Another source of demand for gold arises from people looking for a potential investment. As mentioned earlier, inflation spurs some people to buy a lot of gold. The resulting panic buying during times of inflation causes the price of gold to increase as people seek to insulate themselves from a worsening economy.
ETFs
Finally, ETFs, or exchange traded funds, make evident another factor impacting the price of gold. Gold ETFs essentially own a lot of physical gold and then sell shares of that gold to consumers. When using this method to invest in gold, the consumer never actually owns physical gold. Rather, they hold a share through their ETF.
This method makes investing in gold very easy and much more accessible to people, which in turn makes buying gold more attractive and popular. With this surge in people buying gold, the price then increases as well.
The Price of Gold Over Time
Looking at the last 50 years of data, the price of gold has increased significantly. In the early 1970s, the price of gold was under $50 per ounce. Today, gold is worth over $1,800 per ounce. However, the value of gold has fluctuated over the years. The price of gold has mostly steadily climbed over the years with a few extreme periods.
Throughout the 1970s, the price of gold steadily rose, then suddenly jumped in price from $300 per ounce in 1979 to over $600 per ounce in 1980. The price fell again in the next few years, then steadily rose again. The U.S. saw very little fluctuation in the price of gold from the early 1980s to the early 2000s, with 2008 as the first year that gold reached over $1,000 per ounce.
Following the spike in the price of gold in 2008, the price fell for about a year. Then, the next few years, from 2009 to 2012, saw the biggest increase in the price of gold. In 2009, gold experienced a decline to $970 per ounce, but in 2012, the price jumped to nearly $1,700 per ounce. This represented the most significant increase in price in such a short amount of time.
Following this period, the price fell again, then remained fairly stagnant for a few years between 2015 and 2018. Then, the price of gold continued to rise significantly, even continuing this upward trend today.
If the price of gold follows the same pattern that it has throughout history, then we can expect another significant drop in price for a few years. Of course, we can expect the price to recover after some time at a lower value. If the price of gold follows this same trajectory, then it would be an excellent long-term investment.
However, no one knows if the price will continue to rise or what will happen when all the gold in the world is mined. Just like with any investment, investing in gold has some inherent risk. In general, experts consider gold a more stable investment than the stock market, but it also does not increase in value at the same rate as the stock market.
There is no way to predict the future price of gold. We can only study the factors that might impact it and learn the history of the price of gold. We can be hopeful that this information will give us insight into the future of gold as an investment tool.
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What Affects Gold Prices?
