Why Does Gold Prices Fluctuate?

Well this question is the most common question i have ever heard. Understand that everything in life fluctuates, be it gold prices, fuel prices, interest rates, even the prices of your hot dog next door changes from time to time. The most important attributes needed for an investor is just 3 simple ones.

- Knowledge (understand both sides, eg. those pro-gold, and those anti-commodities)

- Emotional stability (you can be intellectually brilliant, but still lack this important quality)

- Will to act (So what if you know everything to succeed, until you try, you won't succeed)

I'll address the Knowledge part in this article.

I would like to share a quote about stock/commodity prices i find interesting: 'Prices are nothing but numbers that relate to the collective hope, greed, fear, rumors, speculative natures and knowledge of investors.' How well a company's management also does play into factor however, i feel is nothing compared to the collective force of the former factor.' - Mark Shipman


Firstly this would mean just looking at the price of gold or any other stock will give absolutely no indication if it would fall or rise. So what if gold is at $300 or $3000 per ounce. Using this same principle, it is useless to predict where gold will be 1-2 years from now from just its price. A price is a number.

Hence the take home message:'Investing is NOT bargain hunting whereby getting a cheap stock/commodity would mean getting a good deal where it has no direction to go but to rise and let you earn money! This mentality is naive and courting disaster.'

Ok, Why does gold Prices Fluctuate?



When i mean fluctuate, i am talking about charts of gold up to the 60 day limit. It is very obvious to the general direction of gold in the 1-10 years chart. It is heading up.

But why is there quite major fluctuations in the near-term time period? It looks as if the end of the chart is where the beginning is, just one roller coaster ride to no profits, right?

Making things Simple, i attribute these to 5 main reasons.

Comex Gold/Paper Gold:
The prices you see here are reflective on not only all the physical gold that is being traded, it is a reflection of gold's prices together with the futures market, gold derivatives, gold ETFs, and paper gold. Not all gold is bought physically, an extreme amount is being traded electronically, and some of these gold are done in an un-allocated state (you do not physically own it and you have no idea where it is being stored, in short you know close to nothing). Paper gold backed by nothing is dangerous and causes a lot of shorts in the market.

Conclusion:
If more paper gold is relied on trading/less people taking physical gold delivery : Gold prices fall.
If physical gold delivery is desired, and the demand causes the shorts to be exposed:
Gold prices rise.

Short Term Speculators:
Firstly understand, the normal investor such as you and me only comprises of less then 15% of the total market. Big boys such as corporations and billionaires more or less control the market (another reason why you shouldn't fight the market or think you are smarter). An obscene amount of corporations love to play the 'short-term gain game'. To put things simply, they will buy an enormous amount of gold (paper/physical, doesn't matter), gold prices rise, at the peak of their own choosing, they sell close to ALL their gold holdings, the market is flooded by a sudden influx of gold, prices drop. They then buy again 'cheap gold' and rinse and repeat the cycle.

Conclusion: Big corporations (Eg. Central banks, Governments, Billionaires) buying up gold will cause: Gold to Rise.
Big Corporations selling their massive gold holdings : Gold Will drop.

People's Emotions:
This is perhaps the best thing we can see in your daily life, especially herd mentality. If gold prices rise, the greed in people will make them buy gold so as to 'ride the wave', but if gold falls, unless they are equipped with the proper knowledge and emotional stability, they will most probably sell their holdings, causing a domino effect. John sells, Amy sees John selling, she sells, her family sees her selling, they sell, the community sees the family selling, they all sell..etc.

Conclusion: This is linked to the previous factor and almost exactly the same.

Supply & Demand:
This is the simplest to understand, gold is not conjured from thin air, it has to be dug up from the mines and processed extensively using chemicals. It is SUPPLIED from mines and mining companies. Supply for gold is currently decreasing and demand is increasing, hence rising gold prices. Simply put, the mines is not producing enough gold, people want and are buying more gold then is available in the market. Do note that gold is a finite resource like oil, it will run out!

Conclusion:
Supply Up + Demand down: Lower Gold prices.
Supply down + Demand Up: Higher Gold prices.

World Events:
Reading your Wall Street journal is not enough. World events such as the impending threat of the Korean War & the European Debt crisis greatly affects the pricing of gold. Lets take the 2008 bailout of America. Fiat currency backed by nothing flooded the market, corporations that should have died were saved, the panic of a crashing economy was delayed, Gold prices took a dip as the dollars confidence was still relatively strong. A few months later to a year, the fiat currency injection just made matters worse, jobless rates continued, debt increased, people ran to gold for safety. Gold Rose.

Conclusion: Wars/Debt Crisis/Scandals: Gold will most probably rise.
Bailouts/manipulation/dollar confidence boosting: Gold will most probably fall.

The factors for Silver prices is somewhat the same, however it brings into issues such as the JP morgan manipulation. This will be covered soon =)