Why Gold Is Worth More than the Spot Price

Why Gold Is Worth More than the Spot Price

Moving between $1,200 – $1,300 an ounce, gold prices have been doing fairly well lately. However, some experts think it should be worth more. According to its general growth patterns in the last decade, the precious metal’s actual value may be as much as $500 more than the current spot price. How is this possible?

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Gold Prices and Central Bank Expansion

First, what is “spot” price? As Investopedia defines it, it’s “the current price in the marketplace at which a given asset such as a security, commodity or currency can be bought or sold for immediate delivery.”

There’s a general correlation between fluctuations in the spot price of gold and the rate at which certain countries’ central banks expand their reserves of the metal. The two are usually roughly equivalent in value. However, the world’s four largest central banks—the U.S. Federal Reserve, the European Central Bank, the Bank of Japan, and the People’s Bank of China—have expanded their gold reserves by 300% since 2005, yet the price of gold hasn’t kept pace. In fact, it’s even gone down in value slightly in recent weeks.

Experts at Deutsche Bank believe that, in order to keep up with the correlation, gold should currently be worth much more than the amount at which it’s currently trading—around $1,700 an ounce, as opposed to $1,200 – $1,300.

There are only two other times in the last decade when this correlation failed to hold up. The first was in 2008, as the central banks were selling off their gold reserves for increased liquidity. The second time was in 2013, as the Fed announced it would end quantitative easing.

However at this time there doesn’t seem to be a specific reason why prices aren’t keeping up. The actual value should be much higher than the current spot price.

The Value of Gold

So what does all of this mean? It would seem the price of gold is going to start going up significantly in the near future, to catch up with the central banks and its actual monetary value. Deutsche Bank does warn that this doesn’t mean prices are going to skyrocket to $1,700 an ounce overnight. More likely, it will happen gradually, possibly over the next few years.

This makes now a perfect time for long term investors to purchase, while it’s essentially on sale. It’s an investor’s dream come true.

For those putting money into an IRA or 401(k) to save for retirement, gold is historically more stable than the markets. Stocks can go up and down, at times almost at random. If another crash occurs like the one in 2008, it could take a large chunk out of the nest egg you’ve worked so hard to build, and leave you without enough to live on.

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However, gold prices tend to go up steadily in the long term—especially during times of market turmoil. It also maintains its buying power over the years, rather than being subject to inflation the way dollar-denominated assets and cash are. Thus if you put a percentage of your wealth in a gold IRA—at today’s prices—you don’t have to worry about losing your investment.