Gold Investing

A Brief Overview of Gold Investing and Prices

If you're new to gold investing you may be wondering what factors influence the gold price today. Here's a quick look.

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Charlotte McLeod • March 29, 2017

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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 use it as a store of wealth, and many believe it’s superior to any and all paper currencies. Storing wealth with a sense of stability is a popular reason for gold investing.

Yet despite its popularity, the gold price is currently languishing well below its 2011 peak of nearly $1,900 per ounce. It took a steep dive midway through 2013, slipping to about $1,220, and then languished between $1,100 and $1,300 for much of 2014 and 2015. Since then it’s staged a bit of a recovery — in 2016 it rose above $1,300. In 2017 however, the gold price has stayed below $1,300 with the exception of spikes in August and September.

The below chart from Kitco provides a good outline of gold’s price activity since the start of 2010. Data covers the period between January 1, 2010 and March 29, 2017.

Gold investing: Supply and demand

When the gold price began to fall in 2013, market watchers expected some mine production to come off the market; however, most gold producers opted to lower salaries and cut employees rather than reduce their output. Many producing gold companies also chose to reduce exploration in order to keep their existing operations afloat.

In 2016, the tide began to turn. As mentioned, the gold price recovered somewhat that year, even rising above $1,300. Experts began to predict that gold miners would start developing earlier-stage projects, and those same miners became more eager (and able) to buy or invest in smaller companies with gold exploration projects. Overall, gold mine production was flat from 2015 to 2016 at 3,226 tonnes, and is expected to grow this year.

Most gold is produced in China, with Australia and Russia being the second and third top producers.Respectively, they put out 455 MT, 270 MT and 250 MT of the yellow metal in 2016.

Gold demand reached a three-year high of 4,308.7 tonnes in 2016, largely on the back of ETF inflows. ETF inflows for the year came to 532 tonnes, the most since 2009 and the second-highest amount on record. Most inflows came in the first three quarters of the year, and were supported by economic and political uncertainty. Jewelry, central banks and the technology sector are also key consumers of gold.

China and India are major consumers of physical gold, and the title of world’s largest gold consumer is often a toss up between the two. In 2015, China came out on top, taking in 984.5 MT compared to India’s 848.9 MT.

As a side note on supply and demand, investors should be aware that most of the gold ever mined still exists and is accessible — for example, as jewelry or bullion. In contrast, many other metals come off the market when they are used. That means that the gold space is 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 entering and operating in the space 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 as an investment.

Interestingly, that relationship has been less visible in 2017. In March, the US Federal Reserve raised interest rates for the second time in three months, and rather than sinking the gold price increased. Experts have suggested that the reason the hike did not result in a gold price decline is that it was already “baked into” the market — in other words, traders had been anticipating an increase for some time.

Gold is also often used by investors as a safe haven in times of economic and political turmoil. There are countless instances of investors flocking to gold in times of uncertainty, with one being last year’s Brexit. Gold and gold stocks were flying high after the event as investors took cover.

Price manipulation is also a concern in the gold space, but luckily it’s 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. Recently, some market watchers were pleased to see a Chinese bank gain a place on the roster.

Gold investing: The future

While the gold price may be lower than investors would like, it’s clear that interest in the metal remains strong around the world. Those keen on investing in gold would do well to remember that like most markets, the gold sector is cyclical, meaning that what goes down must eventually rise again.

Our 2017 gold price outlook includes a more detailed view of the future for gold — take a read here.

This description was last updated in 2017.

Securities Disclosure: I, Sivansh Padhy, hold no direct investment interest in any company mentioned in this article.