Question 2: What makes the Gold Price move?
Answer 2: It is essential for us to understand the history of money. Gold and silver are the truest form of money. Paper currencies are created as a substitute to gold and silver.
Good Times, Bad Times :
In times of optimism, people trust paper currencies as their value are as good as gold and silver. It seems useless to keep precious metals as they are not productive. Hence, there is little demand for gold and silver when times are good. In times of pessimism, people start to doubt paper currencies as inflation skyrockets.
People would exchange their currencies for gold and silver as precious metals hold value better than paper money which constantly falls in value. It is the application of Gresham’s Law of Money. In bad times, more bad money is put into circulation and unwanted. Good money which is high in demand would be out of circulation.
Example of a Good Time :
In the 1950s, the US Dollar was peg to gold directly at US$ 35 per ounce. Meanwhile, 
global currencies were peg to the US Dollar and thus, enjoyed an indirect fixed relationship with the US Dollar. For instance, the Pound was peg at a fixed rate of US$ 2.80 per £ 1. America had exported more than imports, maintained a balance budget, and had become the largest creditor nation in the world.
The whole world trusted the US Dollar and for the most part of the Western World, gold is soon to be forgotten. There was no such a thing called “inflation”. Gold prices were flat at US$ 35 per ounce.
Example of a Bad Time :
In the late 1960s, France, Spain and Switzerland had lost their trust on the US Dollar. They cashed in their excess dollars for gold. Gold demand rose and overwhelmed supply, particularly from the US government who was disposing gold to keep prices at US$ 35 per ounce.
In 1971, President Nixon had unpegged the Dollar from gold. Inflation skyrocketed. Gold started to move away from its official price of US$ 35 per ounce. When US citizens were allowed to buy and keep gold for themselves in 1974, gold went up as high as US$ 850 per ounce.
Supply & Demand :
In the 1980s, miners scrambled for gold in Australia, Canada and the United States as gold was high in demand. Production figures soared. Supply exceeded demand, causing prices to fall. Slowly, people forget about gold as the stock market was creating instant millionaires in the 1990s. It was a period of high optimism.
In 2008, the subprime crisis had served as a wake-up call to our financial problems today. Central banks which were net sellers of gold have become net buyers of gold to diversify its reserves away from the US Dollar. The mines developed some 20 – 30 years ago have aged. Demand is outstripping supply and thus, leading to gold’s long-term bull market today.
In conclusion, I believe the answer is “people’s perception on paper currencies” & “global supply and demand” for gold.
This article is contributed by bestselling book author, Ian Tai. Want to learn more about gold and silver investment? Get Ian’s free training at Gold Silver Method.
