Gold is the best-known and most popular precious metal, and it’s not hard to see why.
Beyond being a key material for jewelry, investors around the world buy gold as a store of wealth, and many believe it’s superior to paper currency. Storing wealth with a sense of stability is a popular reason for investing in gold.
Over the last decade, the gold price has seen both peaks and troughs. It rose as high as around US$1,920 per ounce in late 2011, but took a steep dive midway through 2013, slipping to about US$1,220; it then remained between US$1,100 and US$1,300 from 2014 to early 2019.
However, a softer US dollar, geopolitical issues and a slowdown in economic growth in H2 2019 pushed gold above US$1,500 that year. The yellow metal’s impressive pace continued in 2020, driven largely by economic uncertainty brought on by the global coronavirus crisis — it took out its 2011 high in July, and in August broke the US$2,000 level, leaving market watchers wondering about its next milestone.
Predicting the gold outlook is difficult, but there are definitely factors to keep in mind. Read on to get an idea of what drives the gold price, from supply and demand to economics and manipulation.
Gold investing: Supply and demand
When the gold price began to fall in 2013, industry watchers expected some mine production to come off the market and foresaw a reduction in gold dealings; however, most gold producers instead opted to lower salaries and cut employees rather than lessen output from their assets.
Many producing gold companies also chose to reduce the amount of cash they put into exploration for financial reasons, opting to keep their existing operations afloat and their net assets stable.
In 2016, the tide began to turn for gold investing. As mentioned, the precious metal’s price recovered somewhat that year, even rising above US$1,300 as demand for gold ticked up. However, times were still tough for exploration — in fact, even five years later the consensus is that not enough money is being spent on finding new gold deposits, hindering gold investment.
Gold mine production was mostly flat for several years leading up to 2019, a year that marked a decline. The COVID-19 pandemic led to further reductions in 2020 as gold miners had to curtail operations. But the story may be different in 2021 — according to UK-based analytics company GlobalData, total gold mine production is expected to rebound by 5.5 percent to 113.9 million ounces for the year and then continue growing to hit 124.1 million ounces by 2024.
Most gold is produced in China, with Australia and Russia being the second and third top producers globally. Respectively, they put out 380 metric tons, 320 metric tons and 300 metric tons of the yellow metal in 2020. China and India hold major physical gold-buying power as well, and the title of world’s largest gold consumer is often a toss up between the two.
Looking at consumption in 2020, gold demand dropped by 14 percent year-on-year to a total of 3,759.6 tonnes — the first time global demand had dropped below 4,000 tonnes since 2009. However, exchange-traded funds inflows more than doubled to reach another record high.
On the flip side, gold jewelry demand marked a record low in 2020. As for gold bars and gold coins, demand ticked up slightly from the previous year.
It’s worth noting that central banks have been net buyers of gold for over a decade now. In 2020, their buying dropped by nearly 60 percent year-on-year, although Q4 brought a return to net buying.
As a side note on supply and demand in terms of gold-mining stocks, investors should be aware that most of the pure gold ever mined still exists and is accessible — for example, as jewelry or gold bullion. In contrast, many other metals come off the market when they are used.
That means gold-mining companies and the gold space as a whole are also affected by saving and disposal tactics, and not just by simple supply and demand.
Gold investing: Economics and manipulation
While supply and demand are key factors in the gold market, it’s important for investors who want to buy and sell to be aware that they’re not the only things that can have an impact on the metal.
In particular, global economics can have a drastic effect on gold. Put simply, gold earns no interest, and thus tends to fare better when interest rates are lower; conversely, when interest rates are higher, it becomes less desirable to buy.
Interestingly, that relationship has been less visible in recent years. 2018 proved to be a year when interest rate hikes actually supported the price of gold, and when the US Federal Reserve made the decision to halt interest rate hikes for 2019, the gold price increased.
Gold investing is also often favored by investors as a safe haven or inflation hedge in times of economic downturns and political turmoil. There are countless instances of people who invest in the precious metals market and use gold as a hedge in times of uncertainty — for example, gold and gold stocks tend to get a bump every time the trade war between the US and China intensifies.
Price manipulation is also a concern in the gold space, and some market watchers see it as a major source of suppression. Luckily, this issue is one that the world’s gold market participants are keen to address. Indeed, early in 2015, the long-running London gold fix was replaced by the LBMA gold price in a bid to increase gold price transparency. Though the process still involves a variety of banks collaborating to set the gold price, the system is now electronic.
Gold investing: The future
With the global COVID-19 crisis sending the gold price to never-before-seen highs, it’s clear that interest in buying and selling the metal remains strong around the world. Those keen on gold investing would do well to remember that like most markets, the gold sector is cyclical, meaning that there is volatility.
The Investing News Network’s 2021 gold price outlook includes a more detailed view of the future for gold and gold investing. You can also check out our latest quarterly update on gold by clicking here.
This is an updated version of an article originally published by the Investing News Network in 2015.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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