Investing can be nerve-wracking. Everyone wants to make money, no one wants to lose any, but you know that prices can swing either way. And so it can be tempting to constantly check on the value of your assets and get nervous about short-term price drops.
If you’re investing for the long term, however, you have to remember to be patient. Investing for long-term goals like retirement means being calm and level-headed. Still, no one wants to invest in a losing asset, and so it’s important to pay attention to the value of your investments.
With precious metals, the long-term trend has been for values to increase. If you’ve invested in gold over the past 20-30 years, for instance, you’re probably familiar with gold’s tremendous price growth.
But not every investor has 20-30 or more years to benefit from a gold price increase. What if you’re only planning to buy gold and hold it for 5-10 years or so? Will the gold price go up during that time period? If so, how much and for how long?
These are understandable questions to ask, even if they can’t be answered with any definite certainty. But understanding what factors influence the gold price and figuring out how those factors may play into your investment over your expected investing time horizon can go a long way toward helping you figure out if the price of gold will go up.
The Gold Price: Supply vs. Demand
Like the price of any other metal, the gold price is subject to the laws of supply and demand. The relationship between the supply of gold and the demand for gold influences which way the gold price moves. So let’s look at a few of the factors that drive demand for gold.
Factors Behind Gold Demand
While gold has industrial uses, its primary use for centuries was as a monetary metal or for jewelry. Even today, investment demand and jewelry demand play a primary role in overall gold demand, while industrial demand plays a far smaller role than it does for other precious metals like silver, platinum, and palladium.
Gold Investment Demand
In any given year about 80% of gold demand comes from a combination of jewelry and investment demand. Demand in these sectors can be very price sensitive, with falling prices often stimulating demand and rising prices dampening demand. But when rising prices are the result of increased safe haven buying, sometimes gold investment demand increases despite rising prices.
Right now investment demand for gold has become so strong that gold coins are in short supply. Gold seems to be faring a little better than silver in that respect, but lack of physical gold supply could end up becoming a significant constraint in the future, particularly if gold demand climbs again during an upcoming recession.
Gold Coins & Bars
Gold coins and bars are one of the most popular and best known methods of investing in gold. While gold coins never really circulated in commerce on a regular basis, there’s still a mystique about them that many investors find appealing.
The downside to gold is that the price is so high, which can seem like a pretty significant barrier to entry. And it can be pretty disheartening to buy thousands of dollars of gold and find that it’s only a handful of coins. But that density of wealth is also one of gold’s major attractions.
$50,000 worth of gold can easily fit in your pocket, and hundreds of thousands of dollars of gold can easily fit in a purse. That has made gold a compact store of wealth that has been relatively easy to protect and easy to transport.
As with silver coins, premiums on gold coins have also risen to reflect the limited physical supply of gold coins. If gold demand continues to remain strong, those high premiums could remain in place for quite a while.
For those who are already gold owners, or who are looking to sell their gold coins, that could be good news, as they should be able to obtain good selling prices for their coins. But for people just looking to get into precious metals it can be frustrating to look at prices for coins being so high above the spot price.
It’s important to remember that the spot price of gold is the price per ounce of a 400-ounce Good Delivery Bar. While the spot price forms the basis for other gold prices in the market, it’s essentially a price floor. And just like the price per roll of toilet paper is cheaper when you buy 30 at a time rather than 4, the prices of gold coins will be at a premium to the gold spot price.
Gold Exchange-Traded Products
Exchange-traded funds are another popular method that some investors use to gain exposure to the gold market. But there are some important disadvantages of gold ETFs that many people may not be aware of.
Perhaps most importantly, owning shares in a gold ETF doesn’t give you ownership of any physical gold, nor can you convert your shares into physical gold. There are also questions surrounding the ownership of gold by ETFs, and whether or not any of that gold is encumbered, hypothecated, etc. But despite all those potential questions, there’s no question that sales and purchases in the ETF market impact the gold price.
Industrial Gold Demand
While gold has uses in industry, especially in electronics, industrial demand for gold plays a relatively small role in overall gold demand. That isn’t to say that someday gold might not be in greater demand, but right now gold demand from industry remains relatively stable, and has a relatively minor impact on the gold price.
Gold Jewelry Demand
Gold jewelry demand is the major competing driver to investment demand when it comes to overall gold demand. However, a significant portion of gold jewelry demand is actually for investment.
India has traditionally been one of the largest consumers of gold, and Indians normally prefer to hold their gold in the form of jewelry. The Indian wedding season, in particular, is normally a sign of increased demand for gold jewelry in India, as newlyweds are gifted gold jewelry to help establish their family wealth. Many temples in India are also beneficiaries of gifted gold jewelry, with some of them sitting on massive stockpiles of gold.
Drivers of Gold Supply
Like silver, there are two primary sources of gold: gold mining and recycling of above-ground gold.
Gold mining is the dominant source of gold supply, accounting for 75-80% of gold supply in any given year. Gold mining is notoriously difficult and energy intensive, with an average grade gold mine producing 5-8 grams of gold per tonne of rock mined. So if you purchase 10 ounces of gold coins, it could have taken 60 tonnes or more of rock to produce that.
Gold mining remains relatively steady year to year, with total mine production in 2021 being higher than it was 10 years ago, but down from its 2018 highs. In the absence of major economic or political instability, expect gold mine production to remain relatively constant.
Gold recycling makes up the remainder of gold supply, and can take many forms. Existing jewelry and coins can be bought up and melted down to create new ingots or coin blanks. And electronics can be recycled for their gold content.
If you’ve ever taken a look inside a computer, you’ll see the gold plating on the pins of CPUs and other electronics. While there isn’t much in a single computer, bulk electronic recycling can reclaim larger amounts of gold.
Gold recycling was down about 30% in 2021 from 10 years prior, and the long-term trend seems to be that less and less gold is being recycled. If that trend continues, and if gold mining doesn’t increase to meet supply, there’s a possibility that gold mining supply might not fully satisfy annual gold demand.
Long-Term Trends in Gold Demand
Long-term trend forecasting of gold demand is difficult due to the cyclical nature of gold markets. Many end users and purchasers of gold are sensitive to changes in the gold price, and for many a higher gold price will dampen demand.
The jewelry sector, for instance, often sees reduced demand for gold as the price increases. But when those price increases occur as a result of increased investor demand, that increased demand often makes up for the decline in demand from the jewelry sector.
If the economy continues to move towards recession, and if inflation becomes entrenched, there’s a greater likelihood that we could see the economy fall into stagflation. During the stagflation of the 1970s gold saw annualized growth of over 30% per year over the course of the decade. What might that do to gold demand if the gold price were to grow like that over the next decade?
Jewelry demand might very well plummet, as more expensive gold would make it more expensive to produce jewelry. But investor demand could increase, despite rising prices, if gold ends up being seen as a growth asset. We’ll just have to keep our eyes open and see what developments occur in markets and in the broader economy that could impact the gold price and gold demand.
Long-Term Trends in Gold Supply
Given the relative stability in gold supply over the past decade, there’s nothing to indicate that gold supply will drop anytime soon. Attempting to forecast changes in gold supply would therefore be difficult.
If the long-term trend of falling gold recycling continues to hold over the next few years, however, and if mine supply can’t meet overall gold demand, there could end up being a mismatch between gold supply and demand. And if demand can’t be met, then that could end up impacting the gold price.
Long-Term Gold Price Forecasts
Forecasting the future price of any asset, let alone precious metals, is difficult. Given the long history of gold as a monetary metal, a safe haven asset, and an inflation hedge, and gold’s price history over the last 50 years, it seems safe to say that the gold price in the future will likely be higher than it is today.
But will the gold price be higher within the time horizon in which you’re investing? 50 or 100 years from now, the gold price should certainly be higher. But what about 5,10, or 20 years from now? That’s a tougher question to answer.
If you look backward at gold price prognostications from analysts, you’ll find predictions that were all over the map. Some are bullish, some are bearish, and some assume mild growth consistent with the status quo. At the end of the day, you’re going to have to judge which way you think gold is going to move and make your decision whether or not to invest in gold accordingly.
Many Americans are looking anxiously at developments in the economy, and looking nervously at their savings and investments. There seem to be growing parallels between what’s happening today and what happened prior to the 2008 financial crisis. And that’s caused many Americans to want to protect their wealth with gold.
Ultimately the decision whether or not to buy gold is yours to make. If you think the economy is fine, and if you trust Jay Powell and Joe Biden to engineer a safe landing, then maybe gold isn’t the thing for you. But if you think the economy is headed toward a rough spot, maybe it’s time for you to start thinking about protecting your assets with gold.
With over $1 billion in gold and silver placements, Goldco has helped thousands of customers benefit from investing in precious metals. Our experts can help you navigate the process of buying gold from start to finish. With over a decade of experience and a commitment to customer service, let us help you safeguard your hard-earned savings and investments with gold.