Gold is one of the most precious metals on earth and it is used in various industries and valued in the form of jewelry, coins, and art. For many years, it has been a hedge against market volatility and instabilities that affect currencies. This is a major reason why it has become a safe bet for those looking to safeguard their investment long-term.
While gold rates are affected by factors such as the strength of the US dollar and global market conditions, gold has shown to be a more stable investment option than any other precious metal. It’s one reason why many people decide to add gold to their portfolios, especially during an economic crisis.
The official gold price changes every day, meaning the value of your gold coins or bars is constantly fluctuating.
There are various factors taken into account regarding the price of gold and its worth. This article will you put you through and take you beyond the basics of gold pricing and its worth.
What Is The Weight Of 1 Pound Of Gold?
Troy And Avoirdupois Measuring System
There’s an old riddle that says, what weighs more, a pound of feathers or a pound of gold?
Some say gold because it is heavier. Others say they are both a pound so they weigh the same. Both are wrong. How can this be? Tradition. Gold is not weighed in the ordinary weights. Gold is weighed in the troy measurement system. One ounce of gold is not the same as the ordinary ounce (avoirdupois ounce).
An avoirdupois ounce converts to 28.34 grams approximately and 16 ounces equal a pound. In the Troy system, only 12 ounces equal a pound and the troy ounce is 31.1 grams. So a pound of gold weighs 373.24 approximately.
How Is Gold priced?
Potential investors use two models to understand and estimate the potential gold value.
Gold Spot Price
The gold spot price is based on the price of one troy ounce of gold. It is the price for gold at any given moment on international markets. Spot price refers to the bid price you see or the price most usually quoted on the exchange market that traders and investors are willing to purchase
The average gold cost per pound is dependent on many factors. The type of gold you are purchasing, the karat rating, and the form of gold (such as bullion or scrap) all affect the price you pay. In addition, where you buy from will also have a significant bearing on how much you pay for your gold.
The price of gold is based on the spot price of the metal, which changes daily. The current market demand and supply determine the spot price.
Gold mining companies can influence the market pricing for gold if they reduce or increase production levels. Gold mining companies set aside a certain amount of money to explore and drill for new deposits every year. This amount increases or decreases the total supply of gold on the market and affects its value and price per pound.
Commercial Value
The commercial value of gold refers to the price at which gold items are actually bought. These two terms are often used interchangeably, but they do have completely different meanings.
The commercial value of gold is the price at which gold items are exchanged from a bullion dealer or jeweler to the public or investors. This price can vary depending on the specific items of the sale. Factors that can influence the commercial value of gold include:
- Craftsmanship
- Minting costs
- Strike quality for coins
- Production costs
- Markup for refiners
- Markup for dealers and jewelers
How Much Is A Pound Of Gold Worth?
In the US, gold is traded in COMEX – a primary exchange where the price is set at any given moment. Gold trades 24/7 worldwide, and some of the biggest exchanges include New York, London, and Shanghai.
In the US and almost anywhere in the world, gold is traded by the troy ounce, not by the pound. As of this writing, the gold price per ounce is $1,865.695. Since there are 12 troy ounces in a troy pound, gold is selling at approximately $22,388 per pound ($1,865.695 x 12).
What Makes Gold So Valuable?
The value of gold is rooted in the history of human civilization, as the metal has remained a symbol of wealth for thousands of years. The value of gold ultimately stems from a social construction, based on the agreement that gold has been valuable in the past and will remain valuable in the future. In addition, gold’s attractiveness revolves around its capacity to maintain its value over time and its uses in jewelry and technological products.
Factors Affecting Gold Prices
While a lot has been said about factors that affect the stock markets, many investors are oblivious to what causes gold prices to rise or fall. Here are some common factors that cause a change in price:
1. Demand and Supply
As is true with any traded commodity, the demand and supply of gold, plays an important role in determining its price. Unlike oil, gold is not a consumable product. All the gold that has ever been mined is still available in the world. The amount of gold mined every year is not very high. If the demand for gold increases, the price increases since the supply is relatively scarce. Hence if you’re wondering why gold price is rising, demand-supply conditions may be one of the reasons.
2. Inflation
When the inflation rates rise, the value of the currency decreases. Also, most other investment avenues fail to deliver inflation-beating returns. Hence, most people start investing in gold. Even if high rates of inflation last for an extended period, gold acts as a perfect hedge since it is not affected by fluctuations in the value of the currency.
3. Interest Rates
Gold prices have an inverse relationship with interest rates. When the interest rates fall, people don’t get good returns on their deposits causing an increase in gold demand and so the price. On the other hand, when the interest rates rise, people sell their gold and invest in deposits to earn high interest leading to a drop in demand and price.
4. Correlation with other assets
Because gold has a low negative relationship with other assets, it is attractive to investors.
5. State Reserves
Every nation has a set amount of gold. When the government begins to buy more gold than it sells, its value rises, and the supply of gold runs out.
6. Geopolitical Factors
During geopolitical crises, the price of gold is frequently on the rise, since it is a secure investment.
7. Gold as a safe haven asset
Coined Wall Street’s safe haven asset, gold is able to store its value in real terms amidst volatile economic weather and provide a hedge against rising costs of living, unlike cash. Central banks have their own gold reserves as a safeguard against financial turmoil.
According to the 2020 Central Bank Gold Reserves Survey, central banks have cited one of the top reasons they are holding on to their gold is because of the precious metal’s “performance during times of crisis”, and 20 percent of them are looking to increase their gold reserves over the next 12 months.
Ways To Invest In Gold
1. Purchasing physical gold
The most common way to invest in physical gold is to purchase gold bullion. Gold bullion refers to investment-grade gold, commonly in the form of bars, ingots, or coins. Investment-grade gold is always at least 99.5 per cent pure:
Gold bars will have the manufacturer’s name, weight, and purity stamped on it. Gold bars typically range from 1/10 troy ounce (one troy ounce = 31.1 grams) to one kilogram.
Gold coins come in a wider range of shapes and sizes. However, do note that you may be paying extra for design elements, such as engravings or collector value. Some coins are also accepted as legal tender in their country of origin, such as UK gold sovereigns, but they are rarely convenient to use as actual currency.
2. Investing in gold ETFs or gold unit trusts
A gold Exchange Traded Fund (ETF) allows you to invest in gold, without having to buy the physical gold assets. It is a fund that holds a range of different gold-backed assets. Some gold ETFs simply track or mimic the price movements of physical gold, whereas others may include shares in gold miners, or various gold-backed derivatives. The underlying asset is what dictates the value of the ETF and will therefore be the determining factor for its performance.
Gold ETFs can be traded like stocks, making them liquid and easy to sell off as and when required. They are also oftentimes cheaper to own for new investors, as you do not have to purchase actual gold, albeit you should check with a qualified broker for the spot price. This allows you to include gold in your portfolio, with a smaller commitment of capital.
3. Investing in gold mining stocks
You can invest in companies mining for gold, rather than investing in gold itself. In theory, the shares of gold mining companies should go up as gold prices rise, as this increases the value of the company’s gold inventory.
There’s also a chance that – with skilled management – miners are able to spend less to extract a greater amount of gold, although conversely, poor management can result in less gold being extracted at greater cost. As such, this is both a potential upside as well as a downside. A mining company’s management is also an added risk factor, and investors need to be wary of mismanagement. Related risk factors include the company’s gearing or debt, as well as environmental or legal policies that could impact its existing operations.