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Global Value-Added (GDP) and Gold

09 Jul 2018 - Archive

Individuals often ask – How is gold connected with the real economy (e.g. employment, production, consumption, and so forth)?

Here is the first part – estimated global GDP per person.

Overall, in 2015, global GDP per person is floating about where a linear regression would predict.

GDP is not largely above trend, as was the case prior to the onset of the global financial crisis.

Global GDP is also not below trend, as was the case during the mid-1990s.

Here is a look at the second part of the question – the price of gold.

As many individuals that have held gold for a long time already know, gold has been through some massive price gains in this century. Gold went from about $400 per ounce at the start of the century to a high of about $1,800 per ounce in 2012.

The price of gold has since been somewhat cooler.

Here is what the two look like overlaid (both are on a year-over-year comparison basis).

Interestingly, there is not a strong relationship.

At times, the two move inversely to each other, meaning that when economic growth weakens, the price of gold may strengthen. This occurred in the latter part of the 1990s.

This observation, though, would be only partially correct. There are certainly times when both move together. This happened in the 1970s and part of this century. Both gold and economic growth gained strength in tandem.

The historical relationship between the two begs the question – What will occur now?

Overall, the global economy looks like it is improving.

There is, of course, large uncertainties about the strength of the improving global economy. There is uncertainty in Greece, and the relationship between Russia and Ukraine about as sour as it can get. These two could push the global economy into a minor recession.

Will an inverse or in-tandem relationship rule in 2015?

There is good reason to believe that the uncertainty across the globe might push gold higher, while a strengthening global economy might also boost total demand for gold, providing a dual boost to the price of gold.

We will see if this actually materializes, although it certainly is a very good guess on where the remainder of 2015 is heading. 

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