Understanding the Process of Gold Price Formation

Due to the fact that gold is different from general commodities, its price formation mechanism has distinct characteristics. Under regulatory conditions, the price of gold is often determined by the government; Under market conditions, although the formation of gold prices, like other commodities, also depends on the relationship between supply and demand, this relationship is still different from general commodities. Without understanding this, it is impossible to accurately judge the trend of gold prices and succeed in the gold market.

Firstly, we must have a profound understanding of the fact that gold is wealth. Why have people been worshipping gold for so many years? Why are so many beautiful words related to gold? Glittering with gold, shining with glory, winning titles on gold charts, and offering valuable advice... This is certainly because gold itself has excellent characteristics and is suitable for making various beautiful ornaments such as jewelry and decorations, but first and foremost, it is because it embodies the labor of humanity over the past thousand years. Gold mining is very difficult. Before 1848, in the thousands of years after human knowledge of gold, people only extracted 10000 tons of gold, so the quantity of gold remained limited and far from meeting people's needs for it. Another important characteristic of gold is its durability. Despite countless trials and tribulations over thousands of years, it has always been able to maintain its original appearance and thus settle down as wealth.

After the great development of science, technology, and production in modern times, human wealth has greatly increased, and the production technology of gold has also developed rapidly, so that the proportion of gold in human wealth has not undergone significant changes. This is the stability of gold. The conclusion drawn by a gold expert after research is that the purchasing power of gold in the mid-20th century was similar to that of the 17th century.

Unlike gold, other wealth is not as stable. After a bumper harvest in agriculture, there will be a phenomenon of "low grain prices hurting farmers". With more oil production, oil prices will fall, and OPEC will try to limit production to stabilize oil prices. The annual production of gold is relatively small compared to the surface stock, so no matter how much the production increases or decreases, it will not have a significant impact on the gold price.

Gold contains a large amount of human labor, which gives it true value, unlike some wealth that contains a large amount of water. For example, the prices of stocks and real estate can increase several times and dozens of times when they rise, and then drop sharply when the foam bursts, because their prices deviate too much from the value. Gold, on the other hand, does not deviate too much from its value at any time.

The above characteristics of gold have given it the most important use, that is, gold is a measure of all wealth.

In ancient times, with the development of production, the exchange of goods began to emerge. The products produced by people's labor are no longer just for their own needs, but can be exchanged to meet more diverse needs, which is the beginning of commodity exchange. The items exchanged must naturally have a certain value and represent a certain level of labor content; At the same time, they should be equivalent, and in the process of exchanging what is needed between the two parties, the items used for exchange are what the other party needs, such as exchanging 1 sheep for 5 pounds of wine. This makes it difficult to exchange because perhaps the person who provides the sheep does not need alcohol and needs 30 kilograms of rice. But at this point, perhaps he can exchange sheep for wine first, and then exchange wine for the rice he needs.

With the development of exchange, a commodity with a special meaning that serves as a "general equivalent" stands out. It must be of the same texture, not easily perishable, easy to separate and preserve, and easy to carry. It can also be broken into whole pieces and broken into pieces. Exchange of other commodities can be replaced by exchange with it. This special commodity is Precious metals such as gold and silver, also known as monetary commodities. So Marx said, "Gold and silver are not naturally money, but money is naturally gold and silver, The first function of gold is to provide materials for the world of goods to express value, or to express the value of goods as quantities of the same name, so that they are similar in quality and comparable in quantity. Therefore, gold performs the function of a general value scale, and it is only because of this function that gold, a special equivalent commodity, becomes currency.

In this sense, the value of any commodity can be measured in gold, such as 1 sheep worth 0.1 ounces of gold, 0.5kg of wine worth 0.02 ounces of gold, and so on.

The reason why gold can serve as a general measure of value is fundamentally because gold is also a product of human labor, which contains undifferentiated abstract labor of humans. It has its own value and high value.

After gold became currency, people cast it into a certain style and defined its value, and its gold content became a secondary thing. A piece of gold coin may be worn, reduced, or lightened during use, but its value has not changed. The subsequent emergence of credit currencies, such as various bills issued by businesses and banks, allows people to exchange a certain amount of gold or silver with them, but they themselves are just a piece of paper and do not have much value. The various currencies issued by the government were initially related to gold and silver, representing a certain amount of precious metals. For example, the pound was originally one pound of silver. But paper money has gradually replaced currencies made of precious metals, and their value has been separated from the content they contain.

After the full development of the commodity economy, people gradually replaced gold with other means such as paper money and electronic currency. Especially after the opening of the gold market, it seems that gold has become a common commodity, and the currency issued by the government has become a "general equivalent". Therefore, people are concerned about how much gold is worth in US dollars, euros, yen, and so on. People often believe that the value of gold is constantly changing. In fact, this is reversing things. The currency issued by the government is actually a commodity, representing a certain amount of value set by the government. The best way to measure their actual value is to use gold, which is the 'ultimate measure'. Therefore, the high or low price of gold reflects the high or low value of this currency. When the gold price of the US dollar drops, it indicates that the value of the US dollar is increasing; When the gold price of the US dollar rises, it indicates that the value of the US dollar is decreasing. Only by understanding this can we correctly understand the changes in gold prices.

Therefore, in this sense, the role of gold as a currency will never disappear in a commodity society, because the value of any other currency or asset will change over time and cannot remain constant. Only the value of gold can last forever. To understand the value of a currency, gold is the best reference and cannot be any other currency. It is precisely because of this that people are willing to hold gold, despite its low returns, and also pay storage fees, transportation fees, and so on. Holding gold is owning wealth, which is an eternal truth.

【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.