Gold – Investment or Speculation?

  • An increase in interest rates should push gold prices lower while a recession should push them higher.
  • Gold mining cash costs are much lower than current prices and do not provide a safety margin.
  • The high risk/high return investment strategy for gold is mining stocks as they are down 80% from their highs but have rebounded almost 100% in the last few months from their January low.


Gold is a controversial investment asset. Some say that is has no function and therefore no value while other see it as the most secure asset to run to in case of trouble. This article is going to elaborate further on both perspectives relating them to the current situation on the gold market.

Influences on the Price of Gold

The 20-year gold price chart shows how volatile gold has been. Gold has traded from lows of $250 per ounce in 2001 to highs of $1,830 per ounce just ten years later in 2011.

1 figure gold prices
Figure 1: Gold prices per ounce. Source: Bullion Vault.

In the shorter term, the January turmoil on financial markets pushed the price of gold from a December 2015 low of $1,051 to a recent March 2016 high of $1,293. A more hawkish tone from the FED on increased interest rates pushed gold prices down again to the current $1,226. Higher interest rates make it difficult for gold to compete with treasury notes that also represent safety, and on top of it have a yield.

The strongest influence on gold prices comes from interest rates and the figure below shows how the current historically high gold prices are correlated to low interest rates.

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Figure 2: Gold price vs real interest rates. Source: Goldcorp.

But it isn’t only interest rates that influence the price of gold. Gold is usually seen as an inflation hedge, so if higher interest rates will be a consequence of inflation due to the pickup in the economy, higher oil prices and increased demand for houses, gold prices might still rise or stay stable. Also, gold is considered a hedge against currency devaluation due to its relatively stable supply and limited availability but interest rate increases would only make the dollar stronger and therefore devaluation is not a risk the US currency runs at the moment.

As with any other commodity, supply has an influence on gold prices. Maybe not such a strong one as with other commodities as gold is mostly used for investment purposes. In relation to supply, higher gold prices enabled less cost efficient projects to come online and thus gold production has constantly increased in the last seven years.

3 figure gold production
Figure 3: Global gold production and miners expected future production. Source: Goldcorp.

If gold prices decline, the output will immediately decrease as expensive mines are shut down, but the gold production curve shows that gold is a rare metal and mining costs are high.

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Figure 4: Gold production cost curve. Source: Mineweb.

At the current gold price, less than 50% of gold mining is profitable if we take capital investments, depreciation and total cash costs into account as the average production cost is $1,314 per ounce. If we look at only mining costs it tells another story as average mining costs are $749 per ounce. This means demand for gold is the one influencing prices. From a supply perspective it is difficult to put a bottom to gold prices as a big chunk of production can be cash flow positive at prices of below $500.

Demand for gold is mostly influenced by the already mentioned interest rate and by fear. As the market is near all-time highs there is not much fear in the air but the January market dip quickly pushed gold prices up by 25%. The more turmoil there is on the markets the more people will seek refuge in gold as—due to limited supply and costly mining—it gives certainty in difficult times.

Investment Opportunities

There are several ways to be exposed to gold. One is just to directly buy a bar of gold and hold it in a safe, but there are more sophisticated ways to be exposed to gold as well.

Gold ETFs are a good choice as they trade as a stock, so you don’t have to physically own the gold as they track the price of gold. The biggest gold ETF is the SPDR Gold Trust ETF (NYSEARCA: GLD). An even more volatile strategy but one that can also have a dividend yield attached to it is to invest into gold mining stocks. Gold miners are much more volatile than gold. For example, if a miner breaks even at $1,200 per ounce, every dollar above that price is pure profit and therefore mining stocks are much more sensitive to fluctuations in gold prices.

figure 5 gold stock etf
Figure 5: Van Eck Vectors Gold Miners ETF. Source: Bloomberg.

As gold prices fell 42.5% from a high in 2011 of $1,830 to a 2015 low of $1,051, gold mining stocks have fallen by 79.5%. As gold rebounded to the current $1,226, the Miners ETF rebounded almost by 100% from a low of $13.03 to a high of $25.83. A sharper decline in gold prices could easily push the price of the Miners ETF down by more than 50% and vice versa for an increase in gold prices.


If you like Warren Buffett you will never invest in gold as according to Buffett it is just a metal that we dig out of the ground, transform into bars and put under the ground again while it produces no economic benefit whatsoever. It is estimated that there is about 181,300 tons of gold in the world, that at current prices would be worth $7.8 trillion. For that money you can but one third of the US land that has an estimated value of $23 trillion.

Buffett’s point is that one third of US land is a much more sensible investment as you produce something and enjoy economic returns while gold is just a piece of metal. But, in times of financial trouble when people panic and lose faith in the economy or the currency, gold prices shoot up. As gold does not produce anything, maybe it should not be called an investment but more a speculation.