Gold as a Store of Value
You don’t have to be a renowned economist to understand why the price of gold will continue to rise over time. Gold is a historical store of value and hedge against inflation. It is durable, portable, and easy to store anywhere. Gold provides insurance against the depreciating value of the US dollar and is the most stable asset class in history. There is no other store of value in the world with a track record comparable to gold. The entry point into gold bullion investment is also significantly lower than other tangible, alternative investments that are treated as a traditional store of value, namely real estate.
Large, well-funded mining operations annually extract tons of gold ore from the Earth’s crust. Gold bullion reserves increase approximately 2% each year from these mining efforts, making gold a scarce mineral that cannot merely be printed into existence. Gold is a heavy element with defining attributes such as resistance to corrosion and high electrical conduction, making it the best option for specific industrial and high-tech applications.
How is Gold Price Determined?
During times of economic turmoil, gold has the potential to see substantial investment demand. Current demand for gold is at historic levels, and we’re seeing this reflected in the gold price on the various exchanges worldwide. A complex set of factors determines gold prices across the world. However, at its fundamental core, gold spot prices that we use in the US are derived from buy/sell futures contracts currently open on the Commodities Exchange (COMEX).
The price-setting contract is the forward month futures contract, which typically garners the most trade volume. However, in certain instances, the second or third-month contract might observe higher trade volume for that gold futures product class. Still, gold traders (hedgers and speculators) almost exclusively utilize the front contract to determine the prevailing gold price.
The gold “bid price” is the highest price any investor is currently willing to pay for gold. This gold bid price (and all open trade orders below it) sit on the COMEX’s open order books, waiting for another gold trader to accept their bid price offer. Conversely, gold traders may also place market orders and buy gold at the prevailing market rate. On the other side of the market, gold sellers set the “ask price”, which is simply the lowest price an investor is willing to sell their gold. The bid-ask spread is merely the difference between the buy and sell price. The bid-ask spread essentially represents the gap between what someone is asking for to buy an item minus a person’s willingness to sell.
What Factors Affect the Price of Gold?
The driving force behind the need and desire to open and close gold futures contracts is the fundamental law of “Supply and Demand.” As gold buyers enter the market, whether for hedging or speculative purposes, the overall demand for gold increases. The increased buying volume will cause prices to rise as the market finds a new equilibrium. Equilibrium is achieved when gold sellers have increased the price level sufficient to slow the influx of gold buyers into the market. Naturally, the opposite course of events will cause a decrease in the price of gold.
The factors that affect buyer and seller sentiment are numerous, but the significant drivers include investment demand, national and global geopolitics, inflation, interest rates, etc.
Why do Buyers Use Gold Price Charts?
How you utilize a gold price chart depends on what you are trying to get out of this alternative asset class. Retail investors seek long-term price appreciation on gold and use gold price charts to track the investment class performance over time. Conversely, a gold investor might be inclined to simply reference the spot price at or around the given time they’re making a gold purchase. This strategy especially holds true if they subscribe to the dollar cost average method of buying gold and the various precious metals.
Gold charts may assist with determining trends and changes in the market for gold buyers looking for well-timed price exposure, especially if margin trading.