Gold is taking a pounding today. The yellow metal is down around 3 percent (at the time of writing) and still falling in pretty much a straight line this morning. Moves like that in most commodities, such as oil, copper or wheat, are pretty much irrelevant to the vast majority of investors, who tend to concentrate on stocks and bonds in their portfolios.
Gold, however, is an exception. There are a lot of retail investors whose portfolios include gold, whether through physical holdings of coins or bullion, or through an ETF such as GLD. Many will be scratching their heads this morning, wondering why gold is collapsing on a day when everything else seems reasonably steady. An explanation of what affects the price of gold seems especially relevant today.
The first thing that has to be understood is that, while gold is a commodity, it is, in many ways, unlike any other. A while ago I described it in these pages as the Kardashian of commodities; pretty to look at and at times fascinating to follow, but fundamentally of no use to society.
That description still holds true. Whereas the industrial and consumer uses of things like oil, wheat, cotton and copper are obvious, the biggest use of gold is for jewelry. It has a very limited use in industry.
The simple fact is that gold is not consumed like most commodities. Its demand is not driven directly by economic growth. From the supply side, gold behaves like any commoditized product. Higher prices lead to an increase in supply as mines that cost more than average to operate become profitable, and miners are encouraged to increase production.
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