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This is its present spot price…
In the late 19th century, gold standards were implemented by many European countries until they temporarily became suspended in the financial crisis involving the First World War. After the Second World War, the Bretton Woods system fixed the US dollar to gold at US$35 per troy ounce.
This system survived the Nixon Shock (1971), when the United States unilaterally suspended the convertibility of the dollar, transitioning to a fiat currency system. The Swiss Franc was the last to be taken off in 2000.
The Spot Price Over The Years
From 1919, the widely used benchmark for its price has always been the London Gold Fixing, where representatives from 5 bullion-trading companies on the London bullion market hold a telephone meeting twice daily. Additionally, global trading occurs continuously depending on the intra-day spot price, which is derived from OTC gold-trading markets across the world.
Over the years, gold coinage has widely been used as currency; and even with the introduction of paper money, the receipt was redeemable for coin/bullion. Since the gold standard, a specified weight has been fixed to a unit of currency.
The US government, for example, set its value to $20.67 per troy ounce, but the US dollar was devalued to $35/troy ounce in 1934. By 1961, maintaining this price was becoming increasingly difficult and a pool of European and US banks agreed that they would manipulate the market to stop further currency devaluation, as demand increased.
Since 1968, its price has varied widely, with a tendency to increase from around 1970, registering a high of $850/oz. in early 1980, and a low of $252.90/oz. in mid-1999. Prices increased steadily from 2001, to exceed the 1980 high on January 3, 2008, setting a new record at $865.35/troy ounce, and another $1023.50/oz on March 17 the same year.
In late 2009, a renewed momentum was experienced upwards, as demand increased and the dollar weakened. On December 2 2009, a new record was set at $1217.13 and it came to hit a price of $1432.57 due to investor concerns over ongoing unrest in both North Africa and the Middle East.
Factors that Determine Its Price
Demand and Supply
Like most other commodities, the price of this precious metal is strongly driven by demand and supply, including demand for speculation. But unlike most other commodities, factors like saving and disposal greatly influence its price than its market consumption.
A larger proportion of all the gold ever mined is still in accessible form, mass-produced jewelry and bullion, for instance, with less value over the product's fine weight, and could return to the market for the right price.
As of 2006, the total estimated gold mined was 158,000 tonnes. According to investor Warren Buffett, the total amount of this precious metal above-ground (worldwide) could fit into a cube measuring 20 meters (66 ft) on each side. However, estimates regarding the amount of this mineral in existence today vary significantly, which means the “cube” could be larger or smaller.
Given the enormous amount of this mineral stored above-ground in relation to the annual production, changes in demand (sentiment), rather than changes in supply (annual production), largely affect its price.
Over the last couple of years, annual mine production of this precious metal could reach 2,500 tons, as reported by the World Gold Council. Jewelry or dental/industrial production takes about 2,000 tons, and the remaining 500 tons goes into the hands of retail investors, as well as gold Exchange-Traded Funds (ETFs).
Both central banks and the International Monetary Fund (IMF) play a key role in determining the price.
By the later part of 2004, central banks alongside official organizations were holding 19% of all above-ground gold as reserves. Dating from September 1999, the 10-year Washington Agreement restricted its sales among its members (the US, Europe, Japan, the IMF, Bank for International Settlements, and Australia) to no more than 500 tons a year. During this period, European central banks were key sellers of this asset, and in 2009, the agreement was further extended for 5 more years, but this time with a 400-ton annual sales limit.
It is widely accepted that a relationship exists between its price and interest rates. Generally, as interest rates rise, gold price (which doesn't earn interest) tends to fall, but dipping rates mean rising gold prices. Therefore, the price of this asset closely correlates to central banks, who make monetary policy decisions relating to interest rates.
Hedging against Financial Stress
Such asset can be used to hedge against inflation. As governments print more paper currencies, their value decreases. And if the returns on real estate, equities, and bonds fail to adequately compensate for both risk and inflation, the demand for commodities, such as gold (a form of portfolio insurance), increases.
On the other hand, after periods of financial stress, like the Great Recession, people become more attracted to conventional investments, and the metal's value may drop.
A Safe Haven Asset
This precious metal is viewed as a safe haven against assets like stocks, as it tends to correlate with stock prices.
Jewelry and Industrial Demand
Apparently, jewelry accounts for more than two-thirds of the total annual demand. Jewelry and industrial demand fluctuations over a couple of years has been because of the steady expansion in upcoming markets of middle class credited to Western lifestyles and offset by the 2007-10 financial crisis.
Short selling of this precious metal can take place in physical or futures market – a key driver of prices – often leading to consistent claims of possible market manipulation by those who strongly believe that its prices may have been artificially suppressed. Having noted gold prices for many years, observers believe that the price has a tendency to fall artificially at the onset of New York trading.
National Emergency, War, and Invasion
During the gold standard, dollars were convertible into gold, and both of them were regarded as money. But people preferred paper bank notes because they were easy to carry around, unlike bullion coins which were heavier and less divisible. Speculations of bank failure could easily result in “hoarding” of gold by citizens, as experienced during the 1930 Great Depression.