Gold is an intriguing commodity. Its price has an inverse relationship with how the economy is doing, and it can be a collectible as well as an investment. But what makes gold unique?
As Forbes contributor Keith Weiner puts it, “Nearly every ounce of gold ever mined is still in human possession. Think about that for a minute. Do we accumulate other commodities like that?”
The answer is not really. Weiner compares it to growing wheat, which is based on an estimate of how much wheat people will consume over a certain period of time. Over-producing or stockpiling wheat makes no sense, because it will go bad before all of it can be consumed. Any leftover wheat goes to “lower uses” such as pet food and wallpaper paste. The price then drops as well, since demand for it is lower.
Gold, however, is much different. The core factor that drives gold prices is the economic concept of supply and demand. As the supply, or quantity, of a product increases, demand for it goes down as well as the price. As supply drops, demand increases and so do prices. The relationship is illustrated in the diagram below – a figure referred to as the supply and demand curve:
With gold, there is no lower use for it like there is for wheat. It is not produced for people to consume – its only use is and always has been storage of money. It serves that purpose equally as well regardless of the price per ounce. Unlike traditional paper investments, gold will never go out of business or rely on the decisions of a company’s officers. It has no risk of default. All of it is used, whatever the price and whether supply is low or high. For these reasons, supply, demand, and the price of gold do not affect how gold is used.
There are many reasons why investors are turning to gold. Adding gold to your portfolio brings diversification, solid protection, and profit potential. Gold and other precious metals offer the comfort and security of physical possession, intrinsic value, immediate accessibility, simplicity, and ease of liquidity worldwide. If you are interested in purchase gold for private ownership or adding it your retirement account, consider requesting a Free Gold Guide by contacting American Bullion at 1-800-326-9598.