During the gold rush that happened in the middle of the 19th century, people headed to California to find as much as they can. They sat next to a stream of water, analyzing the content and hoping to see yellow dust of gold that would help them become wealthier than before.
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Even though we reached a completely different point since those times, this precious metal is still prominent and essential for our overall global economy. Even before the gold rush, its luster, and malleability allowed ancient people to use it as early coins and jewelry.
It was challenging to dig it out of the ground and obtain it, which is why its value was high from the very beginning. After a while, people started using it to accumulate wealth and to facilitate trade.
The facts state that at the very beginning, paper currencies were used as a backup for gold. Therefore, each printed bill had to correspond with the amount of gold stored in central banks so that people could exchange it whenever they want.
Therefore, paper money was just a documented number of golds each person had in the bank. This particular approach lasted until the mid-20th century. Today, things are entirely different, because modern currencies are flat, so there is no link between gold and paper money.
That doesn’t change the fact that people still enjoy it and use it for numerous purposes, from jewelry to hedge against the economic crisis.
Understand the Supply and Demand
When it comes to demand, you should know that the most significant percentage of yellow metal is for jewelry, which is around fifty percent of the overall demand. Another forty percent comes in the form of substantial investment, including bullions, coins, medals, and gold bars.
However, these investments differ from numismatic coins because collectibles have their value based on the demand and its historical significance. The investors in gold include central banks, individuals, as well as exchange-traded funds that are purchasing it for others.
People trust in it as a haven against volatile paper money, which is affected by the stock market and inflation. Check here the latest news about its value.
Therefore, in the case of paper, money becomes worthless, which is the global fear, the world would have to turn to gold to handle trade as before.
This is the main reason why the investors choose to purchase it as soon as they notice the volatility of financial markets, which leads to a spike in its value.
On the other hand, gold is a perfect conductor of electricity, which is why the remaining demand comes for industrial applications, including tech gadgets, heat shields, and dentistry.
Factors That Affect the Gold Price
By now, you understand that gold is considered a commodity that depends on supply and demand. Therefore, the most significant factor that affects its value is the interplay between demand and supply.
For instance, jewelry demand is constant, and it is less likely that anything will change this particular perspective.
On the other hand, the demand for investors, such as central banks, happens due to investor’s sentiment as well as the ability to balance portfolios in case of volatile markets.
As soon as investors start worrying about the health of the economy, they tend to relocate their assets and purchase gold. As a result, due to the increase in demand, the prices tend to get higher.
The critical consideration is supply because gold depends on mining activities. Even though we can find it in nature, the process of extracting is expensive and challenging.
In some cases, seawater can contain the traces of it, but in such small quantities that the expense would be more significant than the overall worth afterward.
That is why we have to differentiate how much gold is in the world and the availability of it. According to the World Gold Council, there are 190 thousand metric tons of gold above ground and at least 50 thousand metric tons that we can extract by using the current technology.
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We can expect that advances in extraction methods will change the supply, which will ultimately affect the overall value. In case its price goes high enough, extractors would profit from extraction, which would eventually boost the quantity and affect the overall cost.