Gold

What Is Gold?

Almost all the gold ever mined still exists. It does not rust, burn or decay, so a coin struck 2,000 years ago can be melted down and sold today. That permanence, combined with scarcity, is why societies from ancient Egypt to modern central banks have treated the metal as a store of value.

For most of modern history gold was money itself. Under the gold standard, currencies were convertible into a fixed weight of metal, and after 1944 the US dollar was pegged at $35 per ounce. That link ended on 15 August 1971, when President Nixon closed the gold window. Since then gold has floated freely, and its price has risen far above that old peg, reaching more than $800 in January 1980.

Demand today comes from four main sources: jewellery, technology such as electronics and dentistry, central bank reserves, and investment through bars, coins, funds and derivatives. The investment and central bank segments are what drive most of the big price swings.

How Does the Gold Price Work?

For traders, the price of gold is mostly a story about what investors give up to hold it. Gold pays no interest or dividend, so the opportunity cost of owning it is the return you could earn on safe assets instead. The key measure is the real interest rate, the yield on government bonds after subtracting expected inflation.

When real rates are low or negative, holding cash and bonds loses purchasing power, and gold becomes more attractive. When real rates rise, the opposite happens. Consider an investor choosing between gold and a 10-year inflation-protected Treasury bond. If that bond yields −1% after inflation, gold’s zero yield is actually the better deal.

Now suppose the bond’s real yield climbs to +1.5%. Holding gold instead costs 1.5% of purchasing power per year, so some investors sell the metal and buy the bond. That shift in demand pushes the gold price down. Something similar happened between August 2020 and autumn 2022: US real yields rose from about −1% to above +1.5%, and gold fell from above $2,000 to below $1,650.

The US dollar is the second lever. Because gold is priced in dollars, a stronger dollar makes it more expensive for buyers paying in euros, yen or rupees, which tends to reduce demand. Traders often read gold alongside the DXY index for that reason.

How Is Gold Traded?

Several instruments give exposure to the same underlying price. The London over-the-counter market is the centre of physical trading, where banks deal in 400-ounce bars and the LBMA Gold Price is set in twice-daily auctions. COMEX futures in New York cover 100 troy ounces per contract and are the most active exchange-traded gold instrument.

Investors who want simple exposure can buy a gold ETF, which holds bars in a vault and tracks the spot price. Traders who want to go long or short with leverage often use XAU/USD CFDs, which follow the spot price without any metal changing hands.

Why Is Gold Important for Traders?

Gold is one of the main safe haven assets. In periods of financial stress, investors move money into it because it carries no credit risk: a gold bar cannot default. After S&P cut the US credit rating in August 2011, gold rose above $1,900 for the first time within weeks.

Central banks also shape the market. They hold gold as a reserve that no other country can freeze or devalue, and in 2022 they bought more than 1,000 tonnes, the most in decades, according to the World Gold Council. Large, steady official buying can support the price even when investment demand is weak.

The main limitation is that gold can lose value for years. From its 2011 peak, the price fell about 45% by late 2015 as the US economy recovered and interest rate expectations rose. It pays nothing while you wait, and a haven label does not guarantee a rise in every crisis: in March 2020 gold fell more than 10% in under two weeks as investors sold whatever they could to raise cash.

Key Takeaways

• Gold is a scarce, indestructible precious metal that trades in US dollars per troy ounce and is quoted as XAU/USD.
• Real interest rates are the main driver of the gold price, because gold pays no yield and competes with inflation-protected bonds.
• A stronger US dollar tends to weigh on gold by making it more expensive for buyers using other currencies.
• Investors use gold as a safe haven and central banks hold it as a reserve asset that carries no credit risk.
• Gold can fall for years when real rates rise, and it can drop sharply in a crisis when investors sell everything to raise cash.