Usually when people ask me: why is the gold price going up today? Or why is the gold price going down today? My answer is often I don’t care.
WHAT?! How can you say that, is probably what your thinking. Your having a website that is suppose to help people understand gold better but you don’t care what direction the price is going? He must be insane.
Of course I care about the price movement of gold. But I care about the long term price and not the short term price. I care about the move and direction that gold has done for the past 50 years (and longer). Not the day-by-day price movements.
If you’re a trader you have to care about what the price movement is for every day. But I am, and hopefully you are, long term investors of gold.
We have invested in gold to hold it for a few years and are not planning on buying gold one month and selling it the next month. That’s why the day-by-day price doesn’t concern me. Is this the way your investing in gold as well? Please leave a comment below about your strategy.
Once you have understood what the fundamentals are that’s driving the gold price over the long term I’m pretty sure you will agree with me that the price movement of one day, or even one year, will not make me become scared and sell my gold position.
The reason why? Because over the long term the fundamentals will drive the gold price up.
It all started in 1971…
In order to understand the long term gold price we have to understand golds role in the financial system. Before 1971 gold was money. This meant that the dollar in your pocket was backed up by physical gold in the vaults.
The paper note in your hand was just a receipt on physical gold. You could walk into any bank and slap down your dollar bill and get physical gold for it.
This meant that there had to be just as much physical gold in the vaults as paper notes in circulation. When the government wanted to print more money (paper dollars) they had to go out and acquire the same amount of physical gold and put in the vaults.
This is what’s called a gold standard. One ounce of gold cost $35 and was set as a fixed amount. It did not change over a long period of time. If the US wanted to print 35 more dollars and put into circulation, they had to acquire one ounce of gold and store it in the vaults.
In the years leading up to 1971 other countries and big investors holding US dollars started to question if there actually was enough gold in the vaults to cover all the dollars in circulation. The US had just spend an enormous amount of money on the Vietnam War and Johnson’s great society and people were worried that they paid for this by printing money and not putting any gold in the vaults.
The reason for this fear was of course because if the US could print money that was suppose to be backed up by gold without backing it up by gold they had now found a way to print gold. And when you print more money, that means that all the money that already exist gets worth less.
So the people and countries started to convert their dollars back into physical gold which quickly drained the US vaults of gold. Before the US vaults were completely empty president Richard Nixon had to suspend the dollar convertibility into gold.
Watch president Nixon giving the speech that took the whole world off the gold standard
This meant that now the dollar was not backed up by anything. It’s just a piece of paper and the only reason it has any value is because we think it does. You can expect to take dollars for your goods and services because you know that you can use that same dollar to buy what ever it is you want.
Otherwise there is not that much different between monopoly money and the dollar. Both are just a piece of paper. One you have confidence in, and one you don’t. But take away that confidence and they’re both worthless.
On the gold standard people had confidence in the physical gold that backed up the paper.
This created the first fundamental reason for why is gold going up in price today
Because the dollars is not backed up by anything now there is no limit to how much money our government and banks can print. Why do you think we have so much debt in the world today? Because as soon as our government can’t pay for any of their obligations they just print that money and spend it.
In fact, today they don’t even have to print the money because most of our money today is electronic on a computer. So if the government wants to spend money on a new war or social security etc. They can, with the help of the federal reserve, just create more digital money and spend it.
This way they ”borrowed” money and accumulated debt. But that money did not exist before. But after the government sells a bond to the Federal Reserve they create the money out of thin air and give it to the politicians to spend.
The price of gold is going up because of inflation.
When you create more money, either more digital money or paper money, you create inflation. What this means in short is that now more money is chasing the same goods and services which means that the price of things rise.
Have you noticed how much the price of ordinary things have gone up? How much more did $100 buy you at the grocery store 10 years ago compared to today? It’s still the same bread, eggs and milk but the price is higher.
To do a short analogy (look at this if you want a deeper explanation into why gold is a good hedge against inflation):
There were two people stranded on an island with nothing more than $10 each. The first day a boat came to the island and said ”I have one extra seat on the boat, the person that pays me the most can come with” (I know, very evil but remember, it’s just a story).
How much do you think the price for the seat on the boat would be? Probably $10 right? They would bid up the price until they didn’t have any more money.
Now imagine that someone from a helicopter dropped down money on the island. $10 each to be precise so now both of them had $20 each instead of $10. How much do you think the seat would cost now? Probably $20 right?
The seat on the boat or any other things didn’t change. But because there is more money (more dollars) the price of the goods and services (a ticket away from the island in the example) goes up.
Everything is going up in price today due to inflation including, and especially, gold.
That is why one of the fundamental reasons for why gold is going up today is due to inflation and as long as our government and banks create more money, the price will continue to go up over the long term.
Look at the long term chart of gold price below. It is going in one direction over the long term, straight UP!
The price of gold is going up because people are worried about the future
Another fundamental reason that is driving the price of gold higher is the fact that gold is seen as a safe haven in economic uncertainties.
Gold has been around for over 5000 years in documented history and it has been seen as the only true store of wealth. Gold is outside of the financial system. I think you can see the big difference between owning a stock or owning some physical gold?
The gold you can see and touch. It has something that is called intrinsic value. The same way as buying a house is a big difference to buying a stock. You can feel the house, you can do stuff with it (live in it, rent it out, flip it…).
This is why a lot of investors will buy gold when they think that the future of the stock market or currency markets look uncertain. If you want some safety in your portfolio you put your money into gold.
This is what investopedia has to say about it:
Gold is typically considered a safe haven when currency markets are volatile.
We can easily show that with a recent market event. On June 23, 2016 the UK voted if they should remain in the European Union or not. This was considered a very big market event that said ”If UK leaves the EU all hell will break loose and the financial markets will crash”.
Of course this made people become scared about the future and look at the chart below what happened to the gold price.
When Britain decided to leave the EU on the 23rd of June 2016 gold jumped from $1253 to $1333. That is a $80 jump just in one day! This shows you that the more uncertain the future is, the more people will invest in gold, driving the price up.
Now I have a question for you. Do you feel like the future is getting more uncertain for every month that passes or not? Please leave your response below in the comments.
Personally I really do feel like we have an uncertain future. Look at the US national debt for example that most certainly will create a stock market crash. The migrant crisis in Europe and all the other problems that Europe have. The probability of war? Terrorism? The climate problems?
There are a lot of uncertainties on the horizon and it feels like every month something is happening in the world to increase this uncertainty.
I’m not trying to scare anybody but it’s almost impossible not to see the economic storm heading towards us. That’s also what a lot of big time investors are saying which is one of the reasons that gold is up around 25% in the first 6 months of 2016 which makes it the best performing asset!
It all changed in 1971 when President Richard Nixon took the whole world off the gold standard. Now gold became a freely traded commodity and it also lifted the restrictions on governments and banks of how much money they could print (how much debt they could accumulate).
This made us not care about the day-by-day price movement of gold anymore. Because there are big fundamental reasons for why gold will keep going up in price over the long term.
Inflation and the risk of economic uncertainties in the future will keep pushing the price of gold up. Maybe it goes down a month but who cares? We are long term investors of gold and we understand the fundamental reasons for why gold have to go up.
I would love to hear your stories in the comments below. If this made you want to start investing in gold today you should check out where I invest in gold. Does a FREE gold savings account sound good to you?
Click the button below to find out where I invest in gold
If you are not yet convinced that gold is a great investment for the future and that every healthy portfolio consists of at least 20% physical gold then check out my top 3 reasons for investing in gold today.
Click the button below for my top 3 reasons to invest in gold today
I hope you got a clear insight in the fundamentals reasons that’s driving the price of gold with this post and that you know the answer to why is gold going up in price today.