Since the beginning of civilization, gold has been considered a very valuable material on the market: because of its beauty or rarity, it was always possible to trade it for other goods.
As the economy evolved, gold ceased to be taken as the main currency. However, even today, it is still considered the king of metals. Its liquidity makes it excellent for trading, and its stability makes it one of the least volatile assets in the market.
This makes it one of the safest investment methods if we know how to use it. But to use it effectively, you need to have a basic understanding of how much gold can be worth.
Although the market usually determines the price of gold, for investors, it will always have a higher price than it marks. However, that is where the question comes in: How much more gold is priced than the market determines?
In this article, we will look at how the price of gold can be valued, how the market does it, and how investors can estimate whether the value of gold will rise or fall soon.
Gold: An asset whose price is based on demand
One of the main reasons gold is considered immune to periods of inflation and stock market crashes is that its market works in a completely different way than others. Gold has a value relative to how much it is desired by others.
In terms of jewelry, gold can fall in price in the face of situations such as rising interest rates on the Federal Reserve. However, the great advantage is that there will always be someone willing to buy gold for its beauty or rarity, so its value will never fall to zero.
In addition, it is a metal in high demand in various electronics industries. This means that because of its usefulness, it is also needed in many devices and its price is maintained.
Finally, its demand-driven market is what makes it so resistant to periods of inflation: no matter how much a currency falls or assets plummet on the stock market, gold will continue to hold its value as long as people are willing to buy it.
Intrinsic Value as an Equity Protector
Another of gold’s added values comes from what has already been discussed concerning its alternative market. In this context, gold is highly valued for its ability to provide excellent capital protection in times of currency devaluation or inflation.
Faced with a falling currency, many individuals seek to protect their savings by buying gold. Gold tends to rise in price during periods of inflation, allowing it to maintain the price of a devaluing currency.
In addition, its liquidity makes it easy to trade when these periods are over. Selling gold to other buyers requires little effort due to the broad market and acceptance of the material.
These characteristics mean that it is seen not only as an excellent lifeline in difficult times but also as a real opportunity to generate income when markets are falling. For this reason, it is very common for financial institutions to increase their purchases of gold bullion to protect their money in the face of economic crises.
Production increase does not have much impact on its value
Just as the price of gold rises when the market is in high demand, it also falls when new deposits are found or when mining companies bring more gold into the market.
However, gold retains much value in these situations. Gold mining is a resource-intensive activity, and each year it becomes more difficult for companies to extract gold from quality deposits.
This creates an added value due to various facts that are not taken into account: labor risk, additional payments for environmental policies, etc. In short, the more exploited a mine is, the more expensive and difficult it is to extract additional gold.
This means that the newly found deposits are not “easy gold” and require more complicated techniques to extract, which is why their price is maintained despite the increase in the amount of gold on the market.
What situations can cause the price of gold to fall?
Although the price of gold can fluctuate during periods of low demand or when new deposits are found, such declines are usually small and temporary. However, one of the factors that most determines the value of gold in the marketplace is the currency to which its value is pegged: the dollar.
When the dollar goes through periods of inflation and weakness, gold tends to rise exponentially in the market. However, the opposite is also possible: when the dollar recovers, gold loses value.
A clear example of how the gold market has been hit recently is the increase in interest rates by the U.S. Federal Reserve. This action was taken to strengthen the dollar, but in addition to creating inflationary processes for other currencies, it also severely devalued the price of gold.
What characteristics should we as investors look for when determining its value?
Having already analyzed the metal, we can conclude that the value of gold is not only based on what the market dictates according to its price: it has an additional value as an investment that anyone willing to buy it should know.
Among these characteristics, we can find the following:
- Liquidity in the market
- High demand
- High utility in different companies
- Resistant to periods of inflation
- The increase of the same in the market does not depreciate its value much.
- Resistant to stock market crashes
- It will always have a certain price, never reaching zero.
On the other hand, some factors are clear signals that the price of gold is about to fall. If we are aware of these characteristics, we can take advantage of the time to invest wisely:
- Rising interest rates on federal reserves.
- Strengthening of the dollar as a currency
- Periods of low demand
With all this, we can conclude that investing in gold is a very good form of investment. However, if we can determine the appropriate time to do it, we will obtain much higher profits.