How is the Value of Gold Determined?

How is the Value of Gold Determined?

gold-bars-1You gain some idea to how strongly humans have always valued gold when archaeologists report finding exquisitely crafted jewelry resting in tombs of royalty buried before 4,000 B.C. While gold coins weren’t minted until around 600 B.C., gold has been seen as a store of value since before written records were kept.

A Long-Term, Universal Appreciation for Gold

What makes the historical lust for and appreciation of the yellow metal all the more interesting is that all the gold ever found would fit in roughly two Olympic-size swimming pools. Moreover, it is estimated that more than 70 percent of all gold ever recovered has come to market since the California Gold Rush of 1849. Those numbers explain why gold was seen as so rare in ancient times.

While rarity is a major factor determining the attractiveness of gold, its allure goes beyond this reality. In fact, platinum, another precious metal, is more than 15 times rarer than gold. However, gold occupies its unique position because it has always been seen as a store of value.

Economists like to point out that 2,000 years ago an ounce of gold could outfit a Roman soldier. Today, an ounce of gold is still capable of outfitting a modern soldier. This is because gold has retained its purchasing power over time. It also explains why gold has always been seen as a trusted method of storing, protecting and exchanging value.

Placing a Price on Value

price-of-gold

While many people use the idea of value and price interchangeably, there is actually an important difference between the two. No more astute investor than Warren Buffet is quoted as noting, “Price is what you pay. Value is what you get.”

When it comes to pricing gold in today’s markets, the price you will pay has traditionally been largely determined by the twice-daily fix of prices by four select London banks involved in the gold market. However, 2015 saw a significant change in that process, which affects roughly $18 trillion in global transactions related to gold each year.

Now, according to the London Bullion Market Association, there will be multiple inputs fed electronically to the pricing model, and the process will involve participants from around the world. While the spot price will still be set and published twice daily (at 10:30 a.m. and 3 p.m. London time), it will be much more influenced by technology than human judgment.

Gold buyers and traders constantly look to the price of futures, or what buyers are willing to sell and buy gold for at a future date. These futures prices attempt to anticipate the ultimate impact of such things as increases in the Fed Treasury rates and overall economic trends. These futures are a major part of the information that feeds into the pricing models and the spot price that is set at the twice-daily fixes. In other words, the spot price of gold that is determined is more of an indication of expected future prices of gold than that current daily trading of the metal.

In the final analysis, the spot price of gold is based on the future expectation of how others will see its value in light of various market influences.

What does the Future Hold for the Price of Gold?

The gold markets today are extremely complex, with the daily price greatly affected by everything from supply and demand to the costs of mining to the ongoing pro-inflationary policies of national governments. However, most experts agree that there are multiple factors creating upward pressure for a long-term increase in the price of gold.

Ultimately, value is always ultimately determined by the market and its perception of any item or medium of exchange. Those who buy gold and invest in gold for the long-term are putting their faith in the historical evidence that this is one commodity that will always be perceived as having a high relative value. That makes its constantly fluctuating price somewhat irrelevant in determining its future value and its role as a way to protect purchasing power.

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