I want to discuss the different factors that affect the price of precious metals in the open market.
In a nutshell, the price of precious metals is driven strictly by supply and demand. The variable in the equation is that many things influence demand.
For the sake of this discussion, let us limit our thoughts to gold. Gold has a few main uses in the world. Jewelry, electronics, medical, aerospace, decoration, Olympic medals and, of course, as a store of value — these are the primary uses for gold today.
About 78 percent of the gold consumed each year is used in jewelry. It is easy to see that as global economics worsen, this use of gold could diminish greatly. After all, none of us really need jewelry to survive; it is merely decoration and a fashion statement. On the other hand, there are countries in the world that place a high priority on purchasing jewelry during specific times of the year for commemorating events and holidays.
Just about everyone’s cellphone or other small electronic device, as well as every computer and laptop, has a small amount of gold in it. Gold is an excellent conductor of electricity and these small devices use very low amounts of voltage; therefore these devices need conductors that have very little resistance and are not subject to corrosion. This is the biggest industrial use of gold today.
Very small amounts of gold can be used in the treatment of certain ailments. Rheumatoid arthritis, for example, has been treated with weak solutions containing gold. Radioactive gold is used in some diagnostic procedures as well.
We all remember seeing pictures of astronauts with their helmets on, the face shield coated with gold to protect their eyes from the sun. Gold film reflects infrared radiation very well and is used to stabilize the temperature of spacecraft.
Finally, what would the Olympics be without the handing out of gold medals for the champions? It just wouldn’t be the same to take first place and get a medal made of steel, lead or tungsten.
The use of gold on everyone’s mind in this day and age, however, is gold as a financial store of value. What makes gold a good store of value is that everyone in the world recognizes its rarity and its use in financial transactions. There is only so much gold in the world and it is not a large amount by global standards.
According to Wikipedia, the total amount of known gold in the world is roughly 5.3 billion troy ounces or put another way, a solid cube 20.4 meters on a side. (And you thought that high school geometry would never be useful in your life.)
While if we saw this amount all in one place it would look like a lot of gold, it is not much when you consider the scale of the world’s economy and how many people want and do own some. This rarity instills the widely held view that it is a store of value.
Gold, as a store of value, is used as ultimate insurance in the case of a financial meltdown or turmoil. Just ask the people of Zimbabwe if their paper money, which has the same backing as ours, i.e. none, if they would rather use gold for their commerce.
Every day we are bombarded with news and rumors about life as we know it and how it is changing and not for the better. Gold has the ability to offer a little comfort in difficult times so people can take care of their families.
Gary L. Rathbun is president and CEO of Private Wealth Consultants, LTD.
