Why is Gold Going Up?

Michelle Kuehner |

By Gary Silverman

I am repeating a series of articles on gold investing written back in 2011. Most everything discussed still applies so I’m repeating it 13 years later since gold has now hit new highs. I’ll add some updated commentary at the end.

Last week we discussed investing in gold, and I ended by introducing a new investment vehicle: the gold ETF (ETF stands for Exchange Traded Fund—a type of mutual fund). These have caught the world by storm. They make investing in gold really easy. Just like buying a gold mining stock, you can buy these ETFs through your broker. You don’t have to store the gold or worry about someone stealing it. Also, the shares of these ETFs are backed by physical gold bullion, not gold mining stocks. Thus, when gold goes up 10 percent, the ETFs go up 10 percent. Likewise when it goes down.

[Some warnings here: Gold ETFs are a special breed of ETF and have different operating parameters and tax implications. Also, while the ETFs are designed to mirror the price of gold as closely as possible, “as possible” doesn’t mean perfectly. As with any investment, do your homework before you invest.]

Because these gold ETFs have proven so popular, most analysts (including this humble financial dude) believe this is one of four reasons that gold has rocketed up in price.

First, ETFs made it easier to buy gold. When things are easier, people do them more. This happened to gold. The ETFs are so easy to buy, more people are doing it.

Second, when there are uncertain times (think wars, financial crisis, terrorists), gold is seen as a safe harbor. Whether it is or not doesn’t matter; people think it is. So, if they get scared and don’t know what to do, they buy gold. Also, people look to gold and other commodities as a hedge in times of higher inflation and a weak dollar.

Third, India and China both are gold buying cultures. Very simplistically, in India, gold acts as a symbol of how good things are for you and your family. In China, gold has been used as an emergency fund for centuries. With both countries’ citizens prospering, their gold buying has increased substantially.

And fourth, gold has been skyrocketing because gold has been skyrocketing. When an investment goes up, people stock up thinking it will go up more. This rush of money makes the investment go up. More people buy in…and this keeps on going. It keeps going, that is, until everyone looks around, realizes that the investment isn’t as good as they thought it was, and stampede to the gates. Think of the tech bubble bursting in 2000.

India’s and China’s cultures are likely not changing. Gold ETFs will always be easy to buy. But our perception of uncertain times as well as the continuing skyrocketing of gold purchases is probably temporary. Since two of the reasons gold is increasing might stop, its value could drop or even plummet. The other two should moderate this a bit, which is why I’m neutral on gold. I don’t see it as the end-all investment many do, but I don’t see it as a bubble that will burst and drive it back down below $1000 per ounce, either.

But like most predictions of the future, mine can be as wrong as the next person’s.

Back to the present. Gold stayed high for the next couple years then lost its luster, losing almost 20% until it rebounded during COVID. This year it is soaring (think uncertainty). The good news for gold bugs is that it’s up about 35% since this article was originally written. The bad news: The S&P 500 stock index did about 10x better.

Next week, fitting gold into a portfolio.