How gold retains its buying power

Since ancient times gold has been used as currency. Many people today think gold will become a good currency if the global financial markets were to collapse. Whether that is true or not, different  investors have different goals for including gold in their portfolios. The value of gold depends a lot on factors.

Adjusting for inflation 

The purchasing power of gold is influenced by the changes in the inflation rate and the strength or weakness of the U.S dollar over time. In the past the selling price of gold has rapidly increased when it is adjusted for inflation. The rate of inflation is different in the U.S and Australia or any other country. If the inflation is high, the gold price Australia will also be high. Gold’s purchasing power was actually quite high in 1980. For it to have that same purchasing power now, gold would have to be priced at $2,000 an ounce. 

Capital gains

Gold does not generate an income, its one major problem is that it generates capital gains. This is different to what other investment assets like stock can do. Stocks and bonds pay dividends and bank accounts earn interest. Gold doesn’t.

Value of the Dollar

The value of gold and its buying power is tied to the value of the U.S dollar instead of other currencies. If the dollar is weaker than other currencies are strong so the gold price Australia is also higher. The value of gold will also be affected by political strain and economic uncertainty. In tumultuous times the price of gold can soar like it did after the events of 9/11 as well as over Brexit and other global political issues. 

Gold’s Value

While the price of gold is driven by supply and demand dynamics, strength of the US dollar, political turmoil and other factors. It is also affected by growth of certain industries that buy most of the gold to make certain products like electronics and jewellery.  There is a lot of gold used in the manufacture of cellphones, laptops and other electronics. It is estimated that a standard laptop contains 0.006 grams of gold, which means that you can get a kilo of gold from 7,500 laptops. A cellphone contains 0.034 grams of the precious metal. As long as this industry keeps growing so then gold will remain as valuable. 

Why is gold used in electronics?

There are some key reasons why gold is used in electronics: Gold has high electrical conductivity. This means it allows electricity to flow with little resistance. There are other metals that have good electrical conductivity like copper and aluminium. However, gold is the best metal to use in the construction of electronic products or devices. 

  • Corrosion resistance of gold is high. Gold does not react with oxygen or rust. Unlike silver, it does not attract that sulphuric hue over time. For this reason, electronics can keep working well for longer without the need for lubrication and maintenance.
  • Gold is very malleable. It can be rolled, stretched and shaped into thin sheets and wire. This makes it easy to be used in the production of small electronics like smartphones.
  • Gold is durable. It can withstand rough handling.
  • Gold is a finite resource and it is for this reason that it is important that gold can be recycled. Gold will always hold its value and as long as it can be recycled, it will continue to be in demand because of the unique properties it possesses. 

There are millions of cellphones that are thrown away every year. In fact, there is more electronic waste than there is gold ore still to be mine. Approximately 50lbs of gold can be reclaimed from a million cellphones. The Olympic Committee in Japan illustrated this fact and took it to the next level by making 5000 medals from recycled cellphones. The gold, silver and bronze medals awarded at the 2021 Tokyo Olympic games were created from metals recovered from 72,000 tonnes of electronic waste. As long as there is a need for gold, this precious metal will always be valuable.