Gold Price

You can find the spot price of gold published in many places, like Gold Price or Bloomberg.

Gold is usually measured and priced in troy ounces. A troy ounce has 2.75 grams more than regular everyday ounces. That is, a troy ounce weighs 31.3 grams.

Gold prices remained quite stable until 1970. Before then, gold had traded at around US$35 an ounce. But in 1971, the price of gold started rising once inflation took off and US President Richard Nixon ended the Bretton Woods system.

The Bretton Woods system fixed the price of the US dollar to gold, and pegged all other international currencies to the US dollar.

The end of the system meant that currencies turned fiat; they weren’t backed by anything. By 1975 an ounce of gold had increased to around US$140. By 1985, the price had more than doubled to US$327. Since then, the price of gold has kept rising over time. Although, like any investment, not always in a straight line.

What affects the price of gold?

Gold is a commodity, and, similar to any other commodity, the price of gold fluctuates. It’s driven by supply and demand.

But with gold, there’s more than meets the eye. Investors and their behaviour also drive gold prices.

First, let’s look at supply.

Gold supply comes mainly from mine production. While the gold supply is usually quite stable, any problems in mining production or supply chains could affect gold prices.

We saw the perfect example of this during the coronavirus pandemic when countries shut their borders. Miners had to stop operations and revise production guidelines from the impact of the virus. It affected supply chains, and logistics and many mints and producers couldn’t get their hands on the shiny metal.

The supply was there…we just couldn’t access it. And, this was at a time when uncertainty also drove demand up, driving gold prices above US$2,000 an ounce.

On the demand side, gold is a commodity with plenty of great qualities. It’s durable and malleable. Gold has demand for industrial uses. It’s used in things like electronics, dentistry and jewellery, among others.

But while gold has some industrial uses, several other things also drive the price of gold because gold is also an investment.

Central bank demand can drive gold prices; they are one of the big buyers of gold. In 2018, for example, central banks bought record amounts of gold, the most since 1967 when gold was still a huge part of the financial system, and the US dollar was pegged to gold.

Gold prices are also influenced by investor behaviour.

As an investment, gold has no yield, so when there’s fear of inflation or when the real interest rate (the nominal interest rate minus inflation) is negative, gold becomes very appealing as an investment. The demand as an investment can be for physical gold, but also ‘paper’ gold, such as Exchange Traded Funds (ETFs).

In times of economic upheaval demand from investors can also rise. After all, gold has been used for thousands of years as money and often considered as a safe haven.

The gold price today

Since our monetary system decoupled from gold, gold prices have seen some wild price swings and a few bull markets.

The first bull market happened in 1970 when the world completely left the gold standard and inflation went haywire due to the oil crisis. Gold prices moved from about US$35 an ounce to around US$800.

The second bull market happened in the mid-2000s after the dotcom bubble popped. When central banks lowered interest rates to lows and introduced policies like quantitative easing. There was the expectation that inflation would take off. Gold did.

Gold prices took a dip in 2013 when inflation didn’t show. But then the pandemic hit, and gold prices took off once again, hitting an all-time high above US$2,000 an ounce.

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Money Morning Australia