Why Does the Price of Gold Rise and Fall?

Some observers of gold trading and the world of finance may say that there is an easy answer to the question posed in the title. These people are of the opinion that speculation causes the price of gold to rise and fall. When enough people express interest in owning gold or selling gold the price rises or falls according to demand. For these observers and analysts the actual “worth” of gold has little to do with its fluctuating price.

Of course, there is a more complex explanation for changes in the gold price, an explanation that uses such terms as “monetary system” and “gold standard.” It may be best to take at least a quick look at gold’s history to get a better understanding of how and why gold prices change. At one point in the past 200 years or so, money had value as a representation of the physical amount of gold behind it (in government possession). The gold standard was a system in which gold, as coins, doesn’t circulate but has a price fixed by “authorities.” Paper money could be converted into gold as people wished to do so. This system ended in 1971, under President Richard Nixon.

Now, the price of gold is set by a process appropriately called “gold fixing.” Members of a “gold pool” discuss the price of gold a couple of times each day, fixing a price for gold that is bought and sold around the globe. Individuals can buy gold or buy paper that states they own a certain amount of gold. In many cases, the individuals never really see or touch the gold they own. Thousands of people could buy and sell, entering and leaving the gold market whenever they want to. This can and does lead to hoarding and trying to “corner the market.” The level of interest in gold, or the lack of interest, determines price.

Periods of war, serious civil unrest or even a huge natural disaster will affect the price of gold. If people lose faith in the currency of their country or in the currency of other countries they may feel that gold is the only asset worth holding. In these situations, the people who have food, clothing and shelter to sell must be willing to accept gold as the “currency” for trade. It is in these unusual times that the real story of gold-price changes comes out. Speculation and occasional changes in the level of interest in gold can move the price up or down slightly. But a major event such as war or hurricane can put gold on the “must have” list for many people.

The interesting thing about this phenomenon is that the true value of gold doesn’t necessarily increase or decrease. There is plenty of gold to be used for industrial and jewelry purposes, more than enough to satisfy all the commercial uses. But the price may rise dramatically or fall dramatically simply because of the way people regard gold – rare and desirable as a collectible item. The most valuable commodity, gold or otherwise, is the one that people will accept as a medium of exchange.