When the recession of 2008 hit, people began to scramble. In a matter of days, they saw their retirement investments drop through the floor, and hearts and dreams plummeted.
People began to plan on working longer, waiting out the market with the hope that the market would rebound by the time their new retirement date rolled around.
You become more interested in diversified investments when your old investments tank. Gold tops the list of new investments.
But how does a person know the value of gold? Is it a worthwhile investment? What determines the value of gold in any given market?
Keep reading to learn about the factors that influence the value of gold regionally and internationally.
What is the Value of an Ounce of Gold?
The monetary value of gold fluctuates with the economy. As of August 2020, the value of gold is slightly over $2,000 an ounce.
Like any commodity, gold has gone through cycles of ups and downs. It currently is at an upcycle, trending up since July 2018 and rising towards its greatest value yet.
You can own gold as either the actual product of gold bullion or as a gold certificate.
Both private and government mints produce gold bullion that you can buy and keep in storage. You can find the gold in coin, bar, and round form in various sizes.
A gold certificate is a piece of paper that says you own a certain amount of gold in an off-site location. A gold certificate still means you own the gold, but you do not have to worry about having to store it.
Everyone has their preference. Some people are happy with the certificate that says they own a particular amount of gold. Others want to be able to hold their product.
Regardless of how you purchase the gold, it still holds the same value depending on the market.
Factors Determining the Value of Gold
We determine value based on more than one quality. Often we think of the monetary value of gold when we ask the question, “what is the value of gold today?”
However, people determine value by more than just the dollars attached to the gold. Four different components make gold valuable.
1. Monetary Value
When we think of the value of gold, we think of monetary value initially.
We ask ourselves questions like, what can I get for this gold coin? How much do I have to pay for a bar of gold?
Monetary value means we recognize gold as currency. Currency is anything two parties are willing to trade for. So if you have gold, and someone is willing to trade food for it, gold is your currency.
We know we can trade goods for gold, which gives it a monetary value. It has extra value over paper money because no one can replicate it or print it.
2. Cultural Value
Cultural value refers to how a particular culture views gold. Some cultures value the precious metal more than others, so they will trade more goods for it. The gold has more value in that culture than in other cultures.
Additionally, some cultures view gold as a type of status. So when an individual wears gold, others respect that person more because they’re a person of higher status.
Some cultures value gold more because they have found a practical use for it. The more useful the metal, the more its value goes up in that culture.
Cultural values are extremely subjective. Gold may have a high value in one culture but a low value in another.
3. Commercial Value
You can best determine commercial value by looking at supply and demand, the monetary value, and a monetary to price ratio. So the commercial value depends on how much gold you have in stock and how much people want it. If your country has a low stock of gold but everyone wants it, the commercial value is high.
Like with cultural value, the commercial value can easily fluctuate because of these fluid factors.
4. Collector’s Value
The collector’s value is also known as numismatic value. Collectors value gold differently based on how old it is and where it came from.
A piece of gold worn by a king hundreds of years ago has more value than a brick of gold today, at least in a collector’s view. A collector is more willing to pay for the ancient treasure because of its numismatic value.
The gold doesn’t necessarily have to be old either. If a famous athlete or starlet wore the gold, collectors will pay more for it.
In the numismatic view, the value of the gold depends on who touched it or who owned it and not what the gold itself is worth on its own merits.
Why Does Gold Change Value?
On any given day you can ask, what is the current value of gold, and you will find a different answer. Why does it change? What determines the value of gold?
When you enter an exchange like Crown Gold Exchange, you may receive more on a different day for your gold than you would on other days. Why?
Several factors drive the price of gold.
Central Bank
The Central Bank reserves play a large part in the price of gold. The Central Bank is the bank or institution that oversees the currency of an entire nation. It determines currency and monetary policies.
So in the U.S., the Central Bank can diversify monetary reserves. When they begin to shift away from paper currency and toward gold currency, the price of gold rises.
Every government has its central bank. When they begin to stock up on their gold reserves, the price of gold rises because gold is becoming more scarce in other areas. It’s valuable.
For example, Russia stockpiled nearly $40 billion worth of gold bullion over the past five years. This mass buying has affected gold prices so that they’ve steadily risen over the last five years.
Worldwide Demand
More than just central banks want gold. The cultural popularity of gold makes it a hot item in the jewelry market. Jewelry alone accounts for 50 percent of gold consumption in the world.
Supply and demand drive prices. The more popular gold jewelry is, the more people want it, and the higher the price goes. People are willing to pay top dollar for the thing that everyone else is wearing.
U.S. Dollar Value
The value of the U.S. dollar affects the value of gold inversely. If the value of the dollar is holding steady, gold prices tend to go down.
However, if the value of a dollar begins to tank, then gold prices rise. People begin to put more faith in gold than paper money at this point, and their faith makes the gold even more valuable.
Financial Protection
Wealthy individuals will use gold to protect their wealth. When an economy begins to dip and fall into a recession, individuals turn to gold to protect their wealth. They see it as a stable investment compared to other investments.
For example, an individual may have a chunk of cash invested in real estate. The real estate market can fluctuate greatly during a recession. That individual may choose to sell the real estate before its value drops and then invest in gold.
Gold can act as a hedge in the case of currency devaluation, when the value of the dollar dips or other investment being to plummet. The interest in gold can even increase in a recession.
Production versus Demand
Like with any product, the production and demand affect the price of the product. Gold exists, but engineers and companies need to mine it to find it. Thus if there is a high amount of gold in circulation but no one wants it, the price will be low.
Conversely, if everyone wants gold but there’s not enough in circulation to meet the demand, the price will drop.
Prices fluctuate for many reasons, but supply and demand is one of the major reasons for the ups and downs.
Ups and Downs
The value of gold varies because of a variety of reasons.
So when someone asks you, “which has greater monetary value: a newton of gold on earth or a newton of gold on the moon?” you can answer with “they are worth the same at the same time.”
Gold markets have their trends outside of other markets. That’s what makes gold such an interesting investment. It will not necessarily tank when everything else drops.
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