BAJ Insight: What do world events have to do with the price of gold?

BAJ Insight: What do world events have to do with the price of gold?

Join us for our weekly BAJ:Insight on the latest industry trends by Rachael Taylor, a freelance journalist who writes about jewellery for a number of titles, including The Financial Times, The Jewellery Editor and Retail Jeweller. In her 10 years reporting on the industry, she has travelled the globe to visit key industry fairs, descended a Fairtrade gold mine on top of a Peruvian mountain, toured silver jewellery factories in Thailand, and regularly has access to the most sparkling jewels and people in the business.

You will often see in the news that the price of gold will drop or rise in accordance with major world events. When Donald Trump’s US presidential election victory revealed itself, the gold price soared, just as it did when the result of the Brexit vote was announced. These events and the price of gold have a connection, but it’s not a political one. Stay with me, and I’ll try and answer some key questions you might have.

You can use sites like Gold Price to track the current and historic gold prices

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So what causes the price to shift? The answer is not – as we might like to think – that gold jewellery demand is on the wax or wane, but rather whether or not financial investors are putting their money into the precious metal. The more investors buying up gold to be held as an investment, the higher the price goes.

When do investors put their money in gold? In investment circles, gold is referred to as a safe haven. This means that when times are uncertain – war, recessions, stock market instability, and so on – it is a safe place to store your cash (better than banks that could fold, or stocks that could crash). It is a solid asset.

The amount artisanal miners are paid for Fairtrade gold is linked to the international gold price

The cost of creating a heavy gold item, like this Shield ring by Polly Wales, would fluctuate depending on the gold price_preview

The cost of creating a heavy gold item, like this Shield ring by Polly Wales, would fluctuate depending on the gold price

What causes the gold price to crash? The price of gold drops when investors sell off their gold – something they do when the political and financial landscapes look more stable. This is because gold can make them vulnerable to losses when times are good. You don’t want to have bought gold at a peak price in an uncertain moment, only to try and sell when times get better and the price is in a trough. You will lose cash. The science of investing is to manipulate these timings for financial investment – and best left to the experts.

Why isn’t it a political issue? Investors don’t care about the left or the right, or the in between. Their behaviour is not impacted by their own personal political leanings. Whether they approve of a particular party, decision or person has no bearing. What does matter, however, is confidence in the market. If an incoming political power looks set to boost the economy, gold will be dropped. If it looks like an election could cause an economic disaster, gold is snapped up. And then there is uncertainty – investors hate uncertainty. When nobody knows what’s going to happen, that is considered to be a bad thing, and investors turn to their favourite safe haven – gold – and so the price shoots up.

 

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What does this have to do with me? Who the next political leaders are going to be seems to have little to do with you sitting at your bench (a scene that also seems far removed from the murky world of investment bankers). Yet it will have a major impact on your working life. Pop to Cooksons when the market is jittery and you may well have to go back to a bespoke client to tell them they need to increase their budget. Alternatively, if you’re going to use gold left over in your safe, bought during a time when the market was bullish and the price per ounce was lower, happenstance has just delivered you a fatter margin. As I said, trying to predict gold price patterns is a dark art better suited to analysts than jewellers, so don’t get lost in the vortex. But understanding what is happening and why, and how it will impact you is useful – knowledge, after all, is power.