According to the latest information reported by the U.S. Money Reserve magazine, there are currently about 57,000 tons of gold left to be mined. While this number may seem quite high at its face value, just consider the fact that there is also more than a quadrillion tons of diamonds left under the Earth’s surface. Thus, 57,000 tons is a rather immaterial amount that is one of the main factors that play a role when it comes to classifying gold as a scarce resource.
Furthermore, there is presently no way to actually produce gold from other elements in a cost-efficient process. Consequently, all sellers are limited to earth-given resources when dealing with this asset. How does that affect the current price in the market? Well, it would be expected to see the rate of gold rise as its availability falls.
The reason why this happens is due to something known as the “law of demand.”
The Law of Demand
According to Hector Sosa Flores, a successful entrepreneur who owns two companies and works with project development in mining and precious metals, the law of demand dictates prices. For those unfamiliar, this is the foundation of the study of economics which states any increase or decrease in the requested quantities will somewhat symmetrically affect the prices. To better understand the concept, consider the following scenario.
When the news of gold becoming a scarce resource spreads through the market, investors are very likely to be interested in getting their piece before it is too late. Accordingly, the overall quantity of gold demanded will spike when interest is piqued. Since there is not enough to go around for everyone, however, the only way that the markets can bring themselves back to equilibrium is by raising the price.
So, when more buyers want to buy gold, its price will increase to demotivate some of the purchases and help bring the supply and demand curve back to its homogeneous point.
Risk Rates of Other Investments
Since gold is traded in the market where people also pursue other assets, there is another important correlation. Namely, when the perceived risk of trading short-term securities and popular ETFs grows, buyers will want to diversify their portfolios.
An easy way to do so is to buy gold as it is a great store-of-value that is not expected to yield or drop much. Although there will not be massive gains of passive income, investors will use the gold purchases as a way to shield themselves from risks of other assets. This may sound familiar because the markets have been undergoing a cycle of heightened risk ever since the latest election in the U.S.
Expectations of Future Increase in Dollar’s Value
Finally, Hector Sosa Flores states that every person who deals with precious metals such as gold has to understand the effects of the dollar gaining or losing its value. Why? Even though gold is an international commodity traded in almost every country on the planet, it is denominated in the U.S. Dollar. In translation, it is not quantified by any of the other 179 worldwide currencies and only gets measured in dollar figures.
The reason why this matters is due to the fact that anything denominated in a certain currency will have a direct relationship with it. So, when the perceived dollar value goes up, buyers will be able to obtain more of the dollar-denominated commodities with it. Given how the dollar has remained relatively strong since President Trump took office in 2016, a lot of gold enthusiasts see the current period as the perfect time to make their gold purchases. Accordingly, they have been making more investments with this precious metal and slowly causing its price the spike.
Why? You guessed it, the law of demand!
