What price an ounce of gold
At some point in your life you’ve probably 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 etc., etc. 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.
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 such that Elon Musk probably couldn’t afford an ounce of it. The metal’s price clearly rises and falls, so what makes one day’s supply and demand intersect at one price, then intersect at a different price the next day?
Indeed, the price of gold has fluctuated throughout history, reaching an all-time high of US$2,074.88 per troy ounce during August 2020 as the COVID-19 pandemic sent investors searching for safe havens and a store of value. However, in dollar value terms, the all-time high was back in late 2011 when it hit US$1,920. Allowing for inflation, that would be the equivalent of US$2,611 per ounce today. Since 2020 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 experienced downturns through 2022.
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 23 metres wide on every side.
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 quadruple 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, 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, wiring in F1 racing cars), leaving the rest to be held and later sold at the buyer’s will, whether in bullion, coin, or jewellery form. Fundamentally, the total supply of gold is more or less static.
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 US Federal Reserve announced in 2014 that it was wrapping up its stimulus program after the financial crisis of 2008. That announcement, coupled with low inflation rates of the time and a red-hot stock market meant that people asked why sit on the sidelines with an inert shiny metal when other investors were 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 upheavals 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 – in 2023 I give you war in Ukraine, China vs Taiwan, North Korea vs Everyone Else, riots in France and wildfires in Greece.
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.
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.
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 some crypto currencies 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.