The price of gold goes up and it goes down. But what’s really driving the price of gold? Is it just pure supply and demand or is it maybe something else?
That’s what we will look at with this post.
Have you wondered why and how gold can fall maybe $20 one day and then rise $40 the next day?
What was it that really happened in the world to spark this giant fluctuation in an otherwise pretty stable and safe investment?
You would think that the price of gold is driven by supply and demand right?
This is everybody’s first thought. That because gold is a commodity it’s price will be determined by the supply of the commodity and the demand for the commodity.
Think about it like this: if I have 10 lollipops and there are 10 people that want these lollipops I probably couldn’t take what every price I wanted right? Everyone would know that they could get their hands on a lollipop.
If instead there were a 1000 people that wanted my specific lollipops I could raise the price. Because there are a lot of people competing (demanding) for my lollipops that are in a short supply the price would rise.
Same goes the other way. If there were only one person wanting to buy my lollipops the price would have to come down in order for me to be able to sell all 10.
In a free market this is how true price discovery works. The price will find an equilibrium based on the supply and demand for the goods.
But unfortunately we don’t live in a free market society anymore.
What are the supply and demand for gold today?
Lets start with the supply of gold because it’s a bit easier to understand.
Gold is a core sustains of earth and it can’t be artificially created. The only way to get more gold is to mine it from the ground where there is only an limited amount of gold.
The ”golden” days where you could find big nuggets laying around in rivers and on the ground are long gone. Today we have to drill deep down in the earth to find any gold.
Most people and entities such as central banks buy gold as a long term investment meaning that they are not really sellers of gold. So much of the new gold supply comes from mining gold and scrap gold.
In other words the increase in supply is rather stagnant. It’s roughly the same amount every year.
What about the gold demand?
Physical gold demand has just skyrocketed over the last few years. Central banks all around the world have been buying gold like never before.
China and Russian central banks especially are buying up all the gold they can get their hands on. Their are also not selling any of the gold they mine.
Even with private persons there are a record amount of physical gold demand. For example India had to start putting restrictions on gold buying and a lot of other countries have been using higher taxes on gold to try and stop the demand.
So if we have record demand for physical gold and a limited supply wouldn’t the price skyrocket?
This is what I meant when I said we don’t live in a free market society anymore. By the laws of supply and demand the gold price should be much much higher than it is today.
The supply is limited (actually decreasing because a lot of countries don’t sell their gold but hoard it themselves) and the demand is the highest it’s been in years.
Still gold is not at a higher price which negates the laws of free market price discovery.
If it’s not the actual supply and demand for physical gold that drives the price then what is it?
What’s driving the price of gold then?
What’s driving the price of gold today is the supply and demand of paper gold, not physical gold. There are actually kind of two markets for gold today. Paper gold market and physical gold market.
So what do I mean with paper gold then?
Paper gold is basically a stock for gold. When the thieves on Wall Street are trading gold they are not actually trading any physical gold. They are trading a thing called a futures contract on gold.
Do you remember that great thing about gold that it couldn’t be artificially created because it’s a core subject of earth? Well, these paper future contracts people can create an unlimited amount of.
If someone wants to bring the price of gold down they can just create a bunch of futures contracts (create supply) and sell into the market. This is how big banks have been caught manipulating the gold price recently.
What does this mean for you?
This means that you should not just look at the artificially manipulated price of gold. The price of gold that you can see today is not set with true supply and demand market forces for physical gold.
It’s set with futures contracts that big banks can created out of thin air, basically printing gold. This has been done to push the price of gold downwards.
I couldn’t care less if the price goes down $40 for a day or goes up $40 for a day. I’m investing in gold for the long term and I’m investing in gold based on the fundamentals that has been driving the gold price for 5000 years.
Basically true supply and demand.
The supply is limited while the demand keep increasing every year. This means that when the price of gold gets set by supply and demand again we will see a much higher price. Maybe a price that we can’t even imagine right now.
Don’t be fooled by the manipulators that are trying to set the price of gold based on paper contracts. Look at the real world instead.
Thanks for reading and I hope you have enjoyed this article. If you have any comments please leave them below.
You should read the fundamentals of what’s driving the price of gold instead. Why is it that gold will keep on rising in the long term? When you understand that you won’t care about the day-by-day gold price either.
Click the button below to find out the gold price fundamentals.