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A gold coin with up and down arrows and the text "Why Do Gold Prices Fluctuate?"

Why Do Gold Prices Fluctuate?

John-Rothans

Written by Philip Diehl

Jun 17, 2022

Over the long term, gold is often seen as a safe-haven asset that can help offset the impact of volatility experienced by portfolios heavily allocated to paper-based assets like stocks. This is why many consumers use gold to diversify their portfolios amidst ever-changing market conditions. It’s also why, if you’re new to gold ownership, you may be surprised to see a dip in gold prices on a particular day. You might be asking yourself, “Why is gold down today?”

The answer is that every market experiences volatility, including the precious metals market. Like any asset class, precious metals may see prices rise and fall in the short term. However, over more than 20 years, gold has established a rising trend, from a low of $252.90/oz. in 1999 to $1,737.50/oz. as of this writing on July 11, 2022. That’s an increase of more than 587%—an excellent return on what many consider an insurance policy on your wealth. Imagine getting a return like that on your home or car.

If you’re wondering why gold is down on a particular day, the truth is that most of the time we can’t pinpoint a single reason for daily changes in gold prices. Too often during my time at the U.S. Mint (and since), I’ve heard reporters or traders providing overly simplified narratives to “explain” what happened on a given day. Markets (all markets, not just the gold market) are too complex for such simple explanations, and there’s also a random element to daily price movements.

To help you better understand the complex nature of the gold market, let’s take a brief look into some of the factors that may contribute to gold price fluctuations.

Gold and the U.S. Dollar

One of the most important factors impacting gold prices is movement in the U.S. dollar. Since gold is usually priced and traded in U.S. dollars, the precious metal becomes more expensive in other currencies when the dollar increases in value. This is why negative economic or political news doesn’t always coincide with an increase in gold prices—at least, not immediately. While stocks may be affected quickly, gold prices may experience relative stability if the dollar remains strong. This may also be partly why, over the long term, gold has historically outperformed other major asset classes during uncertain economic or political environments.

The 2008 financial crisis is a prime example of this dynamic. When the crisis initially hit, the value of the U.S. dollar increased against other currencies, while gold prices (and those of most other assets) declined. However, this decline in gold prices was short-lived, and while other asset classes took a beating, gold rallied from a low of $692.50/oz. in 2008 to a high of $1,920.30/oz. in 2011 before settling to an average daily close in 2012 of $1,668.86/oz.

Gold saw an increase of 240% during this four-year period, while other asset classes struggled to fully recover. This is what we mean when we say that gold is a hedge—it has historically acted as a form of wealth insurance in hard economic times.

Why Does Gold Go Down?

Though gold has historically had an overall upward trend, that doesn’t mean it’s always going up. As with any asset class, the price of gold can decline depending on a number of different factors. Here are a few factors that may contribute to downward movement in the price of gold.

Supply

As noted by the U.S. Geological Survey, “all of the gold discovered thus far would fit in a cube that is 28 meters wide on every side.” This scarcity is one factor that helps drive demand for gold. But while an increase in supply has the potential to cause the price of the precious metal to go down, and while there is more gold to mine out there, the gold supply is currently, more or less, static and unchanging.

Also, as we’ve discussed in other blogs, gold is getting harder to find and more expensive to mine. In most years, demand for gold has outpaced supply from gold mines. But when market conditions push consumers toward other assets or asset classes, the relative supply/demand relationship can change, causing the price of gold to go up and down.

Market and Economic Conditions

Since the supply of mined gold is effectually static, a more likely cause of gold price drops is market conditions. Gold is a longstanding commodity that can be, in many ways, less vulnerable to the severity of fluctuations seen in the relatively more volatile stock and housing markets. This makes gold a great form of “wealth insurance,” and is one reason gold is often considered a better long-term buy than a “quick ROI” purchase.

When stocks are doing well and inflation is low, demand for gold as a hedge drops because consumers are more willing to move away from “safe-haven” assets and into those that are often perceived as riskier—in their minds, there’s more money to be made in the short term elsewhere. When demand for gold drops, the price usually follows.

Why Does Gold Go Up?

Gold has been shown to have an upward trend over the last 100 years. This is why many people who buy gold, whether in the form of coins, bullion, or jewelry, hold on to it for a long time. Two of the main reasons gold price can increase are demand and market conditions.

Demand

For decades, central banks—in particular, the Federal Reserve and European central banks—were major net sellers of gold. When the economy did well, these banks would sell gold at lower prices to help offload their reserves.

However, this is no longer common practice. By 2010, this trend shifted to Western banks reducing their sales and central banks around the world increasing their net gold purchases. The central banks of Russia, China, Turkey, India, and Poland have since become the world’s largest gold purchasers, with Kazakhstan, Hungary, Thailand, Japan, and Brazil rounding out the top 10 gold buyers.

As more central banks (and consumers) look to buy gold, prices rise.

Market and Economic Conditions

These conditions are especially important during seasons of economic turbulence or uncertainty. Numerous factors can cause market turbulence: inflation, deflation, market uncertainty, and geopolitical instability. Since gold has historically been viewed as a safe haven, more countries and individuals try to buy gold as a hedge against uncertain market conditions.

The current economy is a great example of this. As of July 4, 2022, the price of gold was virtually unchanged from one year ago. The Nasdaq was down 25% over the same period, the S&P 500 was down 13%, and the Dow Jones was down 11%. Bonds and, in many markets, residential real estate have also declined. And crypto? Remember when it was touted as a competitor to gold as a store of wealth and a hedge against inflation? Well, we all know what has happened to crypto—on July 5, 2022, The New York Times published an article titled “Crypto Crashed. Wall Street Won.”

Meanwhile, according to a recent article in Fortune, the price of gold has “jumped 34% year over year to 1,234 tonnes in the first three months of 2022.” This coincides with a first quarter marked with severe global economic setbacks. Between the supply chain challenges caused by the COVID-19 pandemic, rising inflation in the U.S., the potential for what some are considering a major recession, and the conflict between Ukraine and Russia, many consumers are looking to gold as a safe-haven asset and potential stabilizer for their portfolios.

This may be a contributing factor in central banks currently increasing their gold reserves. Many countries are diversifying their holdings to reduce their exposure to dollar-denominated assets. In particular, countries that have difficult relationships with the United States—Russia, China, India, Turkey, Kazakhstan, and Hungary—are seeking to reduce their vulnerability to United States international policies.

Why Is Gold Down Today?

If gold happens to be down as you’re reading this and you’re wondering “Why is gold down today?” remember that pinpointing a single, simple reason is not going to provide you with the complete picture.

As we’ve discussed, multiple market factors are constantly in play. Gold prices, as with any other market prices, will fluctuate—and that’s to be expected.

What’s more important is that historically, and over the long term, gold has been on an upward trend. This is why one of gold’s most prominent strengths is as a long-term asset—and why it is a popular choice for both physical ownership and as part of a retirement portfolio in the form of a precious metals IRA.

If you’re interested in purchasing gold or other precious metals as a hedge against volatile marketing conditions, request a free information kit on precious metals and precious metals ownership.

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