MARKET FACTORS IMPACTING THE VALUE OF GOLD

Chapter 4

Gold differs from the rules governing other commodities like oil, crops and produce, in that it’s difficult to assess the commodity’s actual value by traditional assessment tactics.

The problem is that gold has minimal practical use in the business world or in the realm of everyday needs. That doesn’t mean that it’s not a worthwhile investment, but that its value is understood in a different capacity and estimated using different tactics.

Market Factors Impacting the Price of Gold

There are traditionally five market factors that have an impact on gold’s value and can therefore help us assess what it’s actually worth from an investment standpoint.

FIAT CURRENCIES

Gold is often purchased as a harbor and protection against disastrous financial situations that can affect fiat currencies like the dollar or euro. This means that gold is susceptible to market speculation and tends to behave similarly to crude oil in that regard.

As fiat money loses value, the nominal price of gold increases as a means of backing that currency and often as a result of speculation, that gold will be in higher demand because of its universally accepted value.

Debasement is a term that’s used to refer to the devaluing of a particular currency. In the case of gold, a coin is considered to be debased when the quantity of gold is reduced, thereby reducing the gold content or size of that coin.

INFLATION

One of the primary ways that a fiat currency loses value is through the effects of inflation. Since paper notes are declared to be legal tender and can be printed without limitation with no intrinsic value, having too many notes pumped into the market causes its value to decrease. Since gold can’t be printed, it’s a more reliable investment during periods of inflation and uncertainty, thereby increasing the demand for it and its market value.

STOCK MARKET

Gold is subject to speculation in the stock and futures markets, which usually means that as the stock market goes down, the price of gold will go up because of the close correlation between market uncertainty and the value of gold. By the same token, a swollen stock market will tend to make gold less desirable, thereby causing the price to drop.

SUPPLY AND DISTRIBUTION

Like all commodities and products, the value of gold is subject to ebb and flow as a result of simple supply and demand. The more people see a need for and try to obtain gold, the more valuable it will become. At the same time, an increase in the gold supply will mean that the value of gold will decrease because it becomes less rare.

The process of supplying gold begins with mining companies.

Since the California Gold Rush ended, well-funded mining companies have been the primary means by which gold makes it out of the ground and onto the market in whatever form it might take. Once gold is mined it goes to a refinery that is primarily responsible for purifying the gold and parting it, which is simply the act of removing any silver or other impurities. Once the refining process is complete, gold is minted into bars, coins or jewelry before it goes to distribution.

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