In the Bible, there’s a tale of a man buying two luxury suits and a nice pair of shoes for a gold piece. That same piece of gold, adjusted for inflation, can buy the same today that it did millennia ago.
There’s little else in this world that retains its value as stringently as gold. The price of gold has an intrinsic value that’s attached to its rarity.
But there are a collection of factors that change its price. This is what you should expect if you’re looking to enter the metals market.
The Supply Ends up in a Drawer
Gold, as a natural metal, has a limited scarcity. This scarcity is a driving factor in economics. People tend to fight over (with money and demand) over limited resources.
There’s as much gold in the world as there was before it made the first miner who struck it rich. It’s never used up when it’s put in jewelry, electronics, or medical equipment. It might have a current of electricity run through it, but no mass of it is lost in any production processes.
One of two things happens: manufacturers recycle gold in their products or consumers leave it in a jewelry box. So, the supply never really changes. If you own jewelry and aren’t wearing it, you should try selling it to Gold and Diamond Buyers.
This same fact does not hold for its demand. There’s a constant population increase, and that alone can contribute to higher demand. Its intrinsic demand and uses in jewelry and electronics further increase the desire to own gold.
This makes for a peculiar case: the price likely won’t ever decrease (drastically). Roman centurions and soldiers were paid in gold pieces; adjusted for today’s inflation and if the US military were paid in gold ounces, their wages would almost match their ancestors.
Central Banks Control the Price of Gold
Investors consider gold as a dead asset; it doesn’t generate profits from ROI. There’s no use for it when it’s sat in a vault. Holding onto gold is just retention of value — it’s a very safe thing to own, aside from money itself.
Because of this, banks prefer to unload as much as they reasonably can. Banks are profiteering, investing machines. They can’t have something that’s only awarding them costs-to-store.
This is especially true when the economy is flourishing. A country’s bank will decide to sell some of its gold in the perfect market. But, every country wants to partake in the boom, so few transactions are successful.
Thus, a network of central banks has agreed to only sell a certain amount of gold annually. There’s no formal alliance of banks, just an exchange of handshakes in the deal.
Depending on the market climate, central banks may want to get rid of their gold to reinvest in proper assets. But a surplus of gold on the market devalues the metal — at least temporarily. So, when the economy is doing well, expect metals to have a short decline.
A Pot of Gold
Gold will, for all practical assumptions, retain its value. The price of gold will adjust for inflation.
The two main factors that may contribute to change are its limited supply and growing demand. And the current economy and how central banks react to it.
Interested in learning more about gold economics? Read our other articles, they’re a treasure trove.