Gold prices are an important issue for such an activity as gold investment, when gold is purchased, held and sold for its economic value. This is unlike jewelry gold used in jewelry production and industrial gold used in among other electronic components.
In exchange, gold usually counts as a commodity and is traded on commodity exchanges. Gold as well is used in jewelry, electronics, and dental restorations.
Those who write their research papers on gold prices must know that the main difference with other commodities is that gold is not consumed, such as coal and oil. Other metals are recovered, but not to the same extent as gold; 90% of all gold ever extracted is still in circulation. This means that the supply of gold is stable.
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In 2004, the amount mined gold was to 153 000 tonnes. In the same year, the total demand for gold was 3851 tons. The world’s total gold stock would in other words be enough to cover the needs for almost 40 years, which is extremely much longer than for other commodities. By comparison, the inventories of silver are sufficient for 260 days, crude oil for 62 days, and copper for 38 days.
According to traditional market analysis, gold therefore should be cheap, but it is not. It shows that the gold prices are controlled by factors other than supply and demand.
Advantages:
- Gold is a real asset and thus insensitive to inflation.
- The value of gold tends to rise in times of crisis where the value of other investments go down.
Disadvantages:
- Gold generally results in low yields.
Gold, however, has many properties that are quite different from other commodities; characteristics that make gold also a financial asset. A fact that led many countries’ central banks have chosen to invest in gold as currency reserves. The largest holder of gold is U.S. central bank that owns 8,133 tons of gold, which represents 63.8% of America’s foreign reserves. The U.S. gold reserve is kept in a heavily guarded building in the military base Fort Knox. Norges Bank has chosen to go the opposite way; In 2004 they sold out their holdings of gold and today remains only 3.5 tonnes of gold reserve (mainly its collection of historic gold coins) which is less than 0.1% of Norway’s foreign exchange reserves.
The prices of the commodities market is often very unstable compared to equities, but the reliable supply of gold and the large reserves means that the gold price remains stable. That makes gold a real asset, as forest or real estate, but it is much easier to convert. Real assets have the advantage that it does not represent other assets as shares, bonds, or currency. This means that the value is not adversely affected by economic crises. Quite the opposite, the prices of gold are usually to rise in times of crisis as many investors then trying to move their assets to safer investments, increasing demand for gold.
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