We’ve all seen the endless and catchy commercials about selling your gold jewelry because the gold prices today are at an all-time high. Does it lead you to wonder how much you could be earning if you had bought yourself gold when it was cheap? When was it cheap? What made people buy gold then? Should you buy gold now, so that if the price continues to rise you’ll be ahead of the game? Or is this as high as it will get and buying now will lead to losses for you? These are all valid questions. Let’s discuss them all and try to clarify any confusion about gold prices today and what it means going forward.
How Does Gold Relate to the Economy?
Originally, gold was used to actually give money a conceivable value. Simply stated, gold standards (there were many varieties) were predetermined rates used to exchange one nation’s paper and coin currency for gold or to exchange it for another country’s paper and coin currency.
- Until 1968 the rate of exchange for an ounce of gold was $35. This was the rate on any day of any week. If you wanted to purchase 2 ounces of gold, it would cost $70. Any day of any week, it was always $35/ounce. Gold prices today vary daily.
- The “standard rate” was abandoned when westernized countries found gold’s stability to be a negative trait when manipulating values were the goal.
- Large central banks that exchanged multiple currencies would use the standard rate as a gauge for exchange rates. The convenience came from a centralized value.
- When 1 ounce of gold was equal to $35; 1 ounce of gold could also be equal to £50; (i.e.) then $35 was equal to £50.
- Until the mid-20th century the Federal Reserve mandated that banks kept gold on hand and available for exchange, up to 40% of total currency that they held and were accountable for to their customers. This was partially to prevent false inflation of the dollar’s value; because when more money is put into circulation than there is to back its value, the value loses its worth because you have nothing to show for it.
Why Do Gold Prices Change?
It has only been in the last 40-45 years that the Federal Reserve chose to abandon the gold standard systems. As mentioned previously, the difficulty that many countries encountered when attempting to manipulate economic conditions to reflect declining or strengthening markets led to the shift away from gold standard systems. Since abandoning the standard rate of gold, the price of gold today not only fluctuates daily but also trends in series of peaks and valleys that resemble the peaks and valleys of the world’s economic market. It may not, however, relate to the markets in the way that you expect.
The Breakdown:
There is no physical, tradable substance that we (or most other countries) value currency through, anymore. This means there are no longer formal explanations for a declining economy by saying it’s the decrease of this in ratio to an excess of that. (e.g. excess currency in circulation to gold backing it.)
- Simply put, gold is subject to the same shifts that the market is experiencing in a more generalized way. A dollar will only be worth what the economic market determines a dollar is worth – this is the larger concept of inflation. Gold is still subject to a valuation – it also has a worth all its own.
- How much gold that $1 (or $1000) is worth compared to how much an ounce of gold is worth, also changes daily. The middle ground is the answer to the question: What are gold prices today?
Why Do People By Gold? What is the Benefit?
Buying gold is best done for purposes of a long term investment. Gold should not be looked upon like a source for windfall profits, it won’t be 500 shares of some obscure stock that you buy for $.50, and then see an unbelievable rise over 6 months to $30/share. The price of gold today ranged between $1520/oz. and $1550/oz. They both increased almost $30 in 6 months, but the difference was the stock increasing at 5900% and gold at only 2.3%. (The likelihood you find stock that rises that quickly is not great, but it’s not unheard of and good research goes a long way in stock market trading.) Gold, on the other hand, is still worth what it was 30 years ago. Consider 30 years of investing in small of amounts of gold frequently:
- 30 years ago in 1981: (est.) $400/oz. We get to factor in a huge drop in the price of gold in 1981 – various theories exist to why, it’s the nature of the market – but we know now, that ups & downs occur and the value of gold goes right along with it.
- A fair estimate is to put $25/week from a budget aside to buy 1oz of gold every 4 months. (3 oz./year in 1981)
- As time goes on, gold prices rise. We’re establishing a career now though, so we keep buying at 3oz/year most years and sometimes we hit bumps along life’s road so a good average to work with can be 2oz/year.
- 2oz/year 30 years $620 (age price 1981-2011 for easy calc.)
- 60 oz. for $37,200 over the years. . .
- Gold Prices today are $1500/oz
- 60 oz is worth $90,000 on today’s market - A $55,000 Profit with conservative estimations
This helps us to understand how a gold investment is more beneficial than a typical savings account, bond, or mutual fund. The trading currency of those accounts are still the USD (or your local currency), and that is what fluctuates in value. Simply putting money away while markets respond to inflation, or investing in markets that reflect the fluctuations of inflated markets can’t offer you the confidence of stability. Purchasing gold, however, gives you a tangible purchased item with a proven history of not only maintaining its worth but also trending upward in price during downturn economies.
Now, imagine that you had saved $90,000 worth of gold on today’s market and the economy looks like it has recently. One ounce of gold that you bought for $620 is now going to earn you $1500 during harder times. If you find yourself on hard times in a tough economy, it’s simply a matter of selling maybe 10 oz. from your 60 oz. You keep a solid investment (50oz at gold prices today = $75,000) tucked away, while still offering yourself $15,000 to use as a safety-net to prevent truly falling on hard times.
Imagine that you don’t need all $15,000 and you can set it aside about half to see if the gold price drops again. $7,500 buys a lot of gold on a sudden price drop like the one in 1981. This leads to the next question that is asked frequently: if gold prices today are so high, then should I wait or buy gold now?
If Gold is Worth So Much Now, Should I Wait To Buy?
To answer this question, there are two sides (at least) to make points from; waiting for the market to bounce back or establishing a buying pattern right away are both appropriate options – ultimately, it’s a personal decision based on personal scenarios.
- Yes: If you spend 2 years waiting for the price to drop again and it only continued to rise, then you’ve wasted 2 years that you could have been buying gold that much cheaper – whatever that much was over the last 2 years, but instead you were waiting.
- Maybe Not: Do you have money in your budget to buy in at gold prices today, with the expectation that you won’t get it back for many years? If gold is expensive because the market is poor, how are your personal finances holding up against the force of that? If you can’t afford to put it away for 20-30 years as a long term investment, prioritize getting through this gold-peak and market-valley. You’ll be ready for the next go-round.
The most important thing to remember is to view this investment in the long term. When you are making your decision about whether or not you should buy into gold today, two months from today, or twelve months from today, simply be reasonable. When you decide to make your purchase, whenever it happens, consider that you’re look forward to 30+ years of weathering market ups, downs, watching gold prices fall, then dramatically rise and fighting the temptation to sell: Are you going to ask yourself “If only I had started 2 months earlier, then when we pay for our retirement home in cash we could spring for that snazzy doormat the very same day.”
With investing, just like with any other money matter, and especially with long term investing, it is important to focus on the goal so that you don’t lose the beauty of the forest by staring at the detail of one tree.