I have said here before that to me, gold is a Kardashian of the investing world. It is pretty to look at and fascinating to follow, but is of fundamentally no use to society. That doesn’t mean that it has no value. The value of anything — and even moreso its price — is simply a function of what somebody is prepared to pay for it.
Price predictions for gold must therefore be based on its perceived value rather than demand based on any practical use, which actually makes it more predictable in some ways than other commodities such as oil, which has many use cases and natural demand.
When considering oil, one must take into account its level of supply, yes, but also economic conditions in multiple countries, geopolitics, technological advances in motor vehicles, and a whole host of other influences. The calculus for gold is just simpler: The biggest influence by far on its price is the level of supply.
Demand may fluctuate slightly based on perceptions of the value of the world’s major currencies but as recent events have shown very well, that is not the real driver of price. Over the last couple of years, inflation has been a problem, not just here in the US, but globally. That has put upward pressure on gold prices, but over the last few months, as inflation has cooled to the point where most major central banks are looking to cut interest rates, there has been only a minor pullback in gold.
Because it is easier to access and trade than physical gold, I am using the SPDR Gold Shares ETF (GLD) here as a proxy for the metal itself, and the chart for that fund (above) tells the story quite clearly. So why has GLD only given back a few percentage points over the last couple of months and why is it still showing a nearly fifteen percent gain on the year so far?
The answer is contained in the data compiled by the World Gold Council. That data shows that while total gold supply increased by around 3% in 2023, most of that came from an increase in recycling, with mine production increasing by just 0.3% over the previous year. Normally, one would expect a much larger increase this year with prices up over $2,000 an ounce, but if the analysis of why mine production increased so little last year that is contained in this article on CNBC.com is correct, that won’t be happening.
The article points out that price isn’t the issue here. There is simply not that much recoverable gold in the world, and accessing it is more difficult and slower due to the regulatory and permitting requirements imposed over most of the world. Those things aren’t about to change. In fact, if anything, the total recoverable reserves problem will inevitably get worse over time as more gold is extracted.
So, while the conditions that stimulated demand and pushed gold’s price higher have faded away in some ways, the lack of supply can be expected to create a perception of scarcity that can drive gold even higher still.
That is why, even though I am somewhat cynical about gold as an investment, I do own some GLD and will be adding to my holdings on this pullback. If nothing else, natural and man-made supply restrictions should put a floor on the price, and there is a good chance that they could result in a significant demand increase in the coming months, pushing gold and its tracking ETF to new highs before the end of the year.
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