“Gold Price Approaches Record High: Opportunities and Risks for Investors”

Close to the record

In the period from the beginning of March to Wednesday morning, the price of gold on the stock exchange increased by 9-10%, being slightly above the mark of 2025 US dollars per troy ounce. In April, until the denials about the shake-up in the US banking sector, where relatively small banks left the game, but in certain sectors with sufficiently well-known names, such as “Silicon Valley Bank”, “Signature Bank”, etc., while Europe suffered a lot and widely described by Credit Suisse, the price of gold was able to approach almost 2,050 dollars per ounce. Thus, it was close to its all-time high of $2,078.80 per ounce, which was reached on March 8, 2022. It was also a time when financial markets were at their highest level of stress following Russia’s invasion of Ukraine, and investors in commodity markets were buying almost anything they could buy for fear of commodity shortages.

Gold is mostly seen as an investment metal rather than a commodity, yet its rise was driven by general insecurity. If raw material prices are rising in almost all segments, this may be a sign of impending economic turmoil related to raw material shortages. And as soon as such situations arise, gold buyers get excited.

The second factor, why the prices of raw materials often rise, is related to money printing measures, which promote financial inflows also in the securities and raw materials markets. Thus, share prices, gold, industrial metals and other raw materials are rising. This process, in turn, is the initiator of the rise in inflation. The high inflation we experienced last year and now is a combination of exactly this process and factors caused by the Russian invasion of Ukraine. Unfortunately, it was hardly possible to fully prevent these processes – looking at the information available today, it was hardly possible to realistically prevent Russian aggression against its south-western neighbor, just as there was probably no other way than to take measures to print money to stop the economic decline during the Covid-19 period .

Further options

If such economic stimulation at the expense of increasing the money supply did not happen, it is quite safe to say that we would live worse than we do now. There would be no inflation, but with the collapse of the economy, the purchasing power of the population would likely be significantly lower than it is now with all the high inflation. The only thing that can be blamed in this case is that the European Central Bank (ECB) supposedly thoroughly slept on the moment when it was necessary to start measures to limit inflation by raising interest rates. Since the process of curbing inflation was not started in time, now the rates have to be increased by more. This, in turn, creates negative side effects in the economy, emptying the wallets of citizens and companies, as well as countries for higher loan payments, but at the same time can be a contributing factor to the increase in the price of gold.

The basis of this increase could be the concern that central banks, including the ECB, may have to raise rates for a long time in order for inflation to become more subdued. As already mentioned, along with this process, money is removed from consumption, but this in turn has to reduce demand, which also means a drop in economic momentum. This process has already started, but as you can see, inflation is decreasing very reluctantly, because the direction of the national economy is not uniform. This means that interest rates will be pushed up even more and the economic trend may become less and less predictable and less uniform and may also contribute to the arrival of a new financial crisis.

This long and perhaps boring explanation for many could be the reason why interest in gold could increase. It should be noted that economic swings do not mean that only ordinary money savings can be converted into gold. The outflow of funds from various higher-risk assets – stocks, high-yield bonds and commodity markets subject to economic cycles – and directing this money to purchases of the yellow metal could be much more relevant. Likewise, the disputes between the US legislators about the limits of government debt securities, which can affect the settlement of government debt obligations, have a certain encouraging effect on the rise of the price of gold. At the same time, it should be remembered that the price of the mentioned investment metal mostly grows in moments of various exacerbations, therefore, unlike investments in the shares of successful companies, much more attention should be paid to changes in the price of gold

Opportunities to invest

On the stock exchange, the price of gold is determined by trading futures contracts, but it is very often not financially “liftable” for an ordinary investor with a limited investment budget. For example, a 100 ounce gold contract would currently be worth a little over $200,000. As a rule, investors cannot afford such an amount, so margin trading is used, when the investor pays a security deposit, for example, 5% of the investment value, and the rest of the money is “raised” for trading by a bank or some other financial intermediary. However, this type of play, both on the rise and fall of prices, is very risky. As soon as the market swings in the wrong direction suddenly decrease or increase the price so much that the security deposit or some part of it is “melted”, the open position is closed.

It should be noted that even against the background of riskiness, such investments are very expensive, in the case of the just mentioned scenario, the purchase of a contract worth 200,000 dollars would require 10,000 dollars from the investor himself. Citizens also have the opportunity to buy physical gold – bars or coins, but here too they have to face relatively high costs, both due to the volume of the transaction itself and additional costs that could be related to storage. You simply must not throw the gold bar into the desk drawer when you get home, because some treacherous slip will immediately reduce the value of the gold bar.

For the potential investor, especially the small investor, the most attractive opportunity to profit from the increase in the price of the yellow metal is to buy exchange-traded funds that follow the changes in the price of gold. In this case, opportunities also open up for an investor with a limited investment budget, besides, being the owner of fund shares, one does not have to worry so much about momentary fluctuations and it is possible to weather the storm, waiting for a better market situation. One such exchange-traded financial product is SPDR Gold Shares. The value of a share of this investment fund has risen from $168.54 to $187.52, or 11.3%, between March 8, when the banking sector began to swing, and May 2. Investments in the shares of gold mining companies can also be successful, because as the price of their products increases, the companies’ revenues and profit opportunities also increase.