(intriguing orchestral music)
- [Narrator] Over the past few months,
the price of gold has been going haywire.
You can see it on this chart.
As the coronavirus pandemic took hold in March,
the price crashed, alongside stocks,
and then quickly regained.
Then, a frenzy of investment drove up the price
to all-time highs.
On August 4th, it shot past $2,000 a troy ounce
for the first time ever,
before another week of big swings.
This volatility is drawing both main street
and Wall Street investors seeking fast gains
and leading some analysts to call it a modern-day gold rush.
But these big moves call into question
gold's reputation as a safe-haven asset.
- Prices can move at a moment's notice
without fundamental reason more.
More volatility means more risk, and that means gold
isn't the haven, necessarily, that some people think it is.
- [Narrator] To you understand why the price of gold
is so volatile, first you need to understand
how gold trading works.
Like other precious metals,
the price of gold is tied to physical assets.
- The physical gold market involves mining,
refining, travel and sale.
- [Narrator] Gold mining happens on every continent
except Antarctica.
And the top-producing countries
are China, Russia, and Australia.
This work adds up to about 2,500
to 3000 metric tons of gold each year.
This metal is then smelted and refined
before being turned into bars, coins,
and other products like jewelry.
The gold is then shipped around the world,
often stashed in the cargo of commercial aircrafts.
Much of it is sent to London.
Mostly hidden beneath the streets of the city,
the Bank of England's vaults
hold around 400,000 bars of gold worth over $260 billion.
- The physical trading of gold in London
is done behind closed doors and in secret by a few banks.
So, these banks work
with the London Bullion Market Association
to set the physical price of a troy ounce of gold,
and that price determines how much gold is worth everywhere.
- [Narrator] The gold stash in London is rivaled
only by the Federal Reserve Bank of New York,
which holds the world's largest hoard of physical gold.
In other places around the world,
gold is a common investment as well.
- In a lot of cultures in Asia,
people see gold as something that's having prestige
and intrinsic value that can be passed down
from generation to generation.
That can be a big source of physical demand
for jewelry and bars and coins.
- [Narrator] When individual investors want to buy in,
they generally have a few options.
They can purchase physical gold in person from dealers
or on websites like APMEX.
They can bid on thousands of dollars worth of gold
through eBay.
And they can buy exchange-traded funds
that hold physical metal.
The biggest of these is SPDR gold shares,
which is traded on the New York Stock Exchange.
But this is just the physical market.
Gold is also traded on a whole different market
that is tied to commodity futures.
This takes us back to New York,
where gold futures trade on the COMEX division
of the New York Mercantile Exchange.
Futures are contracts which lock the price of a commodity
that will change hands at a specific future date.
A standard futures contract is tied to 100 ounces of gold
worth over $200,000, depending on the market.
- The most actively traded month for gold futures right now
is December because that's a month people expect
the pandemics issues to maybe be resolved by,
and it's a month around
the November's presidential election.
A lot of people are very nervous about the outcome
of that election and that it might be delayed,
so they're using these December gold futures
to give themselves options
and protect against market turmoil.
- [Narrator] But gold has slipped lately
after a long run-up,
a reminder that momentum in this market can change quickly.
Still, this hasn't stopped gold bugs.
And there are a few reasons why people
continue to pile money into the metal right now.
For a lot of investors, it started in March,
when mines, refineries and airlines
shut down across the world,
upending the system usually used
to move gold across the Atlantic and stabilize prices.
But when the pandemic hit,
investors feared there wouldn't be a way
to physically move gold between the markets.
This caused physical gold purchases to soar,
leading to a severe shortage
that drove up the price of futures.
But there are other reasons too.
- There are a lot of people who are very bullish on gold
and think it's an alternative currency
that provides a hedge against inflation
and is very attractive when interest rates are low.
Many bulls are piling into the sector
because they think the Federal Reserve
and other central banks
are eroding the value of paper money
by pumping a ton of cash into the global financial system
to support the economy.
- [Narrator] The increased activity
is contributing to momentum trading,
driving a frenzy for gold, similar to stocks.
But if inflation doesn't materialize,
the momentum that gold is seeing could unravel.
- Analysts say the current trading environment
is extremely risky.
People say all of the economic and political instability
could last for a lot longer than we think.
At the same time, if the economic recovery
goes better than expected,
if there's a coronavirus vaccine
more quickly than we think, gold could have some issues.
- [Narrator] This means that gold could face
more volatility moving forward.
(light orchestral music)