Spot Price of Gold and Gold Demand
Understanding Gold Demand in Terms of Price
Expert economists and successful Gold investors agree: Understanding exactly what goes into pricing Gold is exceedingly difficult. Former Federal Reserve Chair Ben Bernanke once told Congress, much to its chagrin, that no one really understood Gold. We at AMPEX understand Gold and its pricing well, and while we cannot make each of our clients a master of the subject, we are sure that any investor can grasp the basics well enough to strengthen their investment decisions. Here we examine the factors that drive the price of Gold and look specifically at the role of supply and demand in the spot price of Gold on any given day.
The Definition of The Gold Spot Price
The Gold spot price simply refers to the market price of Gold at any given moment, usually given in price per ounce. The Gold spot price certainly influences the cost of Gold investment products you will purchase from your Gold retailer, but it is rare to pay exactly the spot price for Gold. Every reputable coin dealer or retailer has to charge a small premium above cost. That small fee covers the product’s fabrication and shipping costs as well as the dealer’s cost of business. A good Gold spot price chart, such as the one found at APMEX, will list the price of Gold in kilos, ounces and grams and include a historical price chart as well.
Factors Driving the Price
There are several factors influencing the price of Gold at all times. The largest of these price-drivers are interest rates, the stock market, inflation, demand and economic uncertainty related to geopolitical climate. When interest rates are low or the stock market is bearish, many investors turn to physical Gold in the face of their other investments’ failure to thrive. Even cash in the bank earns poorly when interest rates are at an all-time low, so Gold seems especially attractive. Economic uncertainty has always turned investors toward tangible assets like real estate and Precious Metals. The price of Gold per ounce has always been driven by the need to hedge against upheaval. For example, Gold shot up to $850 an ounce in 1980 when the Soviet Union invaded Afghanistan, an event which coincided with the Iranian hostage crisis at the U.S. Embassy in Tehran. The global concern over politics drove the cost of Gold upward as nervous citizens looked for secure places to put their money.
Perhaps the most important influencing factor in the price of Gold is demand. Like any commodity, supply and demand create a delicate and ever-shifting balance to the price of Gold. The supply of Gold differs from other commodities, though, because it depends less on Gold mining than the other Precious Metals markets. Gold already “above ground” is still considered very much in play. Breakdowns of global Gold supplies list “mine supply” and “scrap supply” separately. So, while around 65 percent of Gold produced each year goes into jewelry, in many cultures Gold jewelry represents liquid wealth and could be sold at spot price at any time. Gold used for personal adornment often makes its way back into the Gold supply after a few years or perhaps even generations. What this means is the supply of Gold is relatively stable. Gold is a finite resource but we aren’t running out because products constantly return to the supply. Therefore, demand is everything to the price of Gold per ounce. When the stock market is weak or there is a political upset and people look for secure investments, Gold naturally surges. Whenever Gold consumption goes up, so will its cost per ounce. The trick to understanding the price of Gold is understanding when the demand for Gold might spike, which is generally during turmoil.
Take the time to learn the basics of Gold demand and you will have an edge on understanding why the spot price of Gold per ounce is what it is at any given moment. Knowledge will help you make savvy investment choices and get the most for your investment dollar.