As the economy and market continue to experience volatility, the traditional adage of "buying gold when the going gets tough and selling it when the going gets good" seems to hold. For many, purchasing gold has been a means of safeguarding their wealth and assets. Individuals can capitalize on opportunities in uncertain economic times by accumulating enough gold. Is it currently advisable to invest in precious metals or to sell it? To better understand the impact of market volatility on gold investments, let's examine the matter more closely.
Gold has been used as a currency for over 3,000 years, with historical records dating back to ancient times. During the Middle Ages, gold was widely used as currency, and even the earliest Western monasteries were known to have gold coinage.
Throughout history, gold has been a highly prized commodity traded globally. In recent times, gold has maintained its value, and its worth has often been linked to other commodities such as silver, diamonds, and cattle.
In the past, the value of commodities was measured in grains of corn or bushels of grain. However, measuring metals by weight eventually became more practical, leading to attempts to standardize the measurement of metal values using troy weight. Using standardized weights allowed traders to translate prices into a fixed value more easily when converting prices into currency through trading.
The troy pound or Troy ounce is the most widely used weight measurement for gold, with a pound equating to 12 ounces (roughly equivalent to 31.1034768 grams). The conversion rate from Troy weight to the US dollar became essential in the 1800s when gold experienced a surge in demand worldwide.
In the past, an ounce of gold was worth over $1,300 (in 2008 dollars). However, in modern times, price trends have varied. During periods of war and economic uncertainty, gold prices have risen significantly. This was evident during World War II when individuals sought out gold despite not being permitted to own any. During that era, gold sold for approximately $35 an ounce, equivalent to about $400 in today's currency.
The most notable increase in gold prices occurred in the 1970s when President Nixon severed the direct link between gold and currency. This eliminated the official gold price, enabling gold to become a commodity traded based on supply and demand. Since then, the value of gold has been volatile. In 1980, gold prices peaked at around $850 per ounce. Gold prices hover at about $1,300 per ounce (in 2008 dollars).
Recently, bullion dealers have reported many individuals interested in acquiring gold. People buy gold for various reasons, such as a hedge against economic downturns or believe its price will continue to increase. However, the truth is that the gold market does not offer any guarantees, and one must evaluate the current market conditions.
The amount of gold available in the market is measured in ounces or troy ounces. As per the World Gold Council, over 4,000 tons of gold have been mined since mining began approximately 4,000 years ago. An ounce of gold is valued at around $1,300, signifying that the total mined gold would be worth over $6 trillion.
As more gold is mined, the overall supply in the market decreases. This supply and demand situation is causing concern for many individuals worried about its impact on the price of gold.
Gold prices have displayed volatility in recent years, fluctuating between $300 and $1,000 per ounce. Several factors, including speculation, money flow, and interest rates, can influence changes in the price of gold. These factors impact all futures markets, including the gold market.
Additionally, currency exchange rates also impact the value of gold. If a country's currency's value drops compared to another country's currency, goods from that country become more affordable for individuals using the latest currency. For instance, if the dollar's value decreases in relation to the Euro (used in Europe), American goods become cheaper for Europeans.
If the value of a country's currency drops relative to another country's currency, then goods in the former region become cheaper for those using the latest currency. Conversely, when the value of a country's currency increases to another country's currency, the price of goods in the former country becomes more expensive for individuals using the latest currency.
Interest rates also impact the demand for gold. Individuals seek investments with high return potential and low risk during economic uncertainty. For instance, when interest rates are relatively high, people opt for cash savings accounts, such as CDs and Treasury Bills, rather than investing in stocks or commodities with a potentially higher rate of return. This results in lower demand for gold.
The amount of money flowing into the market significantly impacts gold demand. Suppose a bull market in stocks generates more cash than can be invested in other assets. In that case, there is typically an increase in demand for gold because it is viewed as a haven for investors during times of uncertainty. Conversely, investors tend to cash out their investments in a bear market and return them to banks or credit unions, making less cash available for investment opportunities. This decrease in investment capital reduces the demand for gold.
Inflation is another factor that impacts the price of gold. When inflation goes up, the value of gold typically increases as well. This is because individuals holding gold can sell it for a higher price than they originally bought it. For example, if an ounce of gold could purchase one loaf of bread five years ago but can now purchase two loaves, the value of gold would increase.
Gold has long been a topic of controversy for a multitude of reasons. One of the most debated topics is whether or not a central bank can manipulate the price of gold through large-scale buying and selling of the commodity.
Some individuals argue that gold's value is solely determined by central banks, and without the ability to trade in gold, it would have no worth. Conversely, others argue that gold has intrinsic value, making it a viable asset without government involvement. Additionally, some argue that central banks overstate the amount of gold in reserves, which inflates the commodity's importance.
Central banks also frequently buy and sell large quantities of gold as part of their monetary policies, which can significantly impact the gold market. The Federal Reserve Act permits the government to buy and sell gold but does not provide any specific strategy. This has resulted in significant controversy in recent years, as many individuals believe that the government should not be involved in the buying and selling of gold. For instance, in 2008, the Federal Reserve bought and sold nearly $600 billion worth of gold, equating to roughly one-quarter of all gold.
Investing in gold carries its risks, and some investors may be concerned about what could happen if the US government were to sell some of its gold reserves. The US holds almost 8,100 tons of gold worth over $340 billion. However, supply has declined significantly since 1980. Since gold doesn't have an intrinsic value, even a small loss could cause a significant decrease in its value, making it difficult to sell. It is essential to consider these risks before investing in gold.
Educating yourself about the market and its potential risks is crucial to invest in gold. Numerous online resources are available for people interested in learning more about investing in gold.
Gold can also buy and sell other commodities like copper and oil. In countries with an unstable currency, gold can be used as an alternative currency. You can exchange your gold for an alternative currency like the Canadian Dollar or Chinese Yuan with a nominal fee.
Gold's value has declined since its peak in 2010, and many analysts expect this trend to persist throughout the year. Investors are turning to other assets, such as real estate and bonds, resulting in lower demand for gold and further devaluation.
However, experts predict that gold will have more significant potential over a more extended period as the growth of emerging markets like China and India will drive up demand and ultimately increase its price.
Another factor that can influence gold prices is inflation. Inflation often prompts investors to seek alternative investments that offer higher potential returns than government bonds or cash, as inflation does not affect them. This would drive up the demand for gold, increasing its value.
In the coming years, inflation is expected to rise gradually, which could cause an increase in gold prices. Although investors have seen a slow growth in their income, experts predict that their wages will rise in the next few years. If this prediction comes true, some investors may sell their gold, which could help increase its price.
Another important factor in predicting the price of gold is its status as a haven asset. Investors are more interested in assets expected to provide higher returns, making them less likely to invest in gold because of its perceived lower returns.
Several credible sources predict the future of gold prices, but there is one main concern that many experts share about the commodity's future. The Federal Reserve of the United States holds over 8,000 tons of gold, valued at over $400 billion at current prices. Many experts are worried about central banks like the Federal Reserve because they can manipulate the price of gold by affecting its supply on the market.