The value of gold derives from its scarcity as a commodity, as well as from its long history as a stable medium of exchange. The price of gold tends to rise during economic uncertainty and when inflation is high. The price of gold is generally inversely related to the value of the United States dollar because the metal is denominated in dollars. All else being equal, a stronger U.S.
dollar tends to keep the price of gold lower and more controlled, while a weaker U.S. dollar is likely to drive up the price of gold due to increased demand (because you can buy more gold when the dollar is weaker). The price of gold fluctuates based on a combination of supply, demand and buyer perceptions and behavior. However, unlike paper money, the supply of gold doesn't change much over time, so its value is relatively constant.
Over shorter periods of time, the inflation-adjusted price of gold fluctuates dramatically, making it a poor hedge against inflation in the short term. The dollar and the desire to keep gold as a hedge against inflation and currency devaluation help boost the price of the precious metal. Similarly, with fear and uncertainty at an all-time high during the COVID-19 pandemic, gold-backed exchange-traded funds recorded unprecedented inflows and the price of gold reached an all-time high. In addition, buying gold bars can provide protection in emergency situations such as war, disaster, or other type of protection in the event of a crisis.
From the 1870s until the First World War, the gold standard was a global structure in which the money supply of almost all countries was fixed at a fixed price of gold or was linked to another country participating in the system. While some ETFs represent ownership of real metal, others hold shares in mining companies instead of real gold. Gold is also in demand from exchange-traded funds that own the metal and issue stocks that investors can buy and sell. Another 7.5% of demand is attributed to the technology and industrial uses of gold, where it is used in the manufacture of medical devices such as stents and precision electronics, such as GPS units.
Studies have shown that gold can be an effective hedge against inflation, but only for extremely long periods of time, measured in decades or centuries. Gold also has a low and negative correlation with the stock market, suggesting that changes in the price of gold are largely independent of stock developments. This is partly due to rising interest rates, which increase the opportunity cost of holding gold, as investors forego interest income they could earn from savings accounts or bonds. Gold prices can be extremely volatile, and that means that gold is not a fully stable investment.
The United States maintains stocks of gold at the Fort Knox ingot deposit in gold bricks weighing 27.5 pounds per unit. While the price of gold fluctuates frequently, if you consider gold as another way to expand your portfolio, it's a solid option for most.