To answer the question “what drives gold prices”, it is important to understand the nature of gold and its complexity. Ben Bernanke, the former president of the United States, even found it difficult to understand. To make an informed decision when investing in gold, it is important to compare Gold IRA companies to determine which one best suits your needs. Is gold a commodity? It is, from the physicochemical point of view, a precious metal that is extracted like any other commodity. In that context, therefore, it is not a guarantee, but rather a tangible, hard or real asset.
However, it is also a single product that behaves more like a monetary asset. From an investment point of view, the inverse relationship between gold and the US. The dollar is practically the only characteristic it has in common with other commodities. The yellow metal has a very weak correlation with other commodities (except silver) and, according to the World Gold Council, “is less exposed to fluctuations in economic cycles, generally has lower volatility and tends to be significantly more robust in times of financial pressure than other commodities”.
In addition, gold is used less in industry; therefore, it is also less exposed to the economic cycle, while its production is geographically diversified. Its sources of demand are more diverse, making gold less volatile and less exposed to specific risks than other commodities. And because gold is one of the densest elements, it's much easier to store than other commodities. What else sets gold apart from other commodities? The yellow metal is almost indestructible: practically all the gold that has been mined still exists in some form.
Therefore, the ratio between stocks and annual flows is much higher for gold than for other commodities (see chart). Thanks to this characteristic, gold is much less likely to suffer production shocks, since the price of gold is not so dependent on current production. Any shortages can be filled relatively quickly with recycled gold from air stocks. On the contrary, any positive supply disturbance (sudden increase in mining production) affects gold prices to a limited extent, since annual mining production is only a small fraction of total gold reserves.
Therefore, the price of gold is mainly driven by demand and changes in reserves, rather than by the supply of gold mines. To further complicate matters, gold is not only differentiated from other commodities, but also from other currencies. The yellow metal is a tangible asset, so it can't be printed like fiat currencies. Thanks to its relatively inelastic supply, gold preserves its purchasing power, thus serving as a hedge against government madness and as a safe haven during financial crises.
In that sense, it is not a currency, since we cannot buy goods and services with gold coins or ingots, but rather it is an anti-trust currency, which is purchased when trust in central banks and governments decreases. Ironically, those central banks buy and hold gold themselves. In other words, gold does not depend on a single government or central bank, so its price is not influenced by political decisions or by the solvency of any institution. Therefore, gold is a global monetary asset, which reflects global developments and is strongly traded in the spot market (unlike commodities that are mainly traded in the futures market, but in a similar way to currencies).
Gold is not a commodity or a currency. It combines the characteristics of both, making it basic money, that is,. A commodity that has historically been chosen as money and that remains a global monetary asset. No arbitrary political action can increase its supply and has no counterparty risk (that is why it has no return), so it is still traded as a currency or as insurance against fiat currencies and market instability is intrinsically related to paper money.
The terms spot gold and gold spot price refer to the current price at which you can buy or sell an ounce of physical gold. However, we know that the demand for gold is actually much higher, since the WGC focuses on annual flows and ignores huge gold stocks and the fact that demand and supply for gold come from marginal buyers and sellers who accumulate a large number of ingots. A ring made of 14-karat gold has 58.3% pure gold mixed with 41.7% of a more durable metal alloy, usually a mixture of zinc, nickel, silver and copper, with a coating similar to rhodium. According to the World Gold Council, the world's total gold supply is around 197,576 metric tons, more than NASA's space shuttle orbiter.
In reality, the gold market is very large and liquid compared not only to other commodities, but also to the foreign exchange or debt markets. This is, incidentally, another distinguishing feature of gold compared to other commodities (except silver). . .