It is known that the settings of gold alloys used in gold coin minting and jewelry differ from country to country. To give information about gold settings in general, the purity of gold in an alloy is expressed in carats. The pure state of gold, called 24 carats, is specified as 0.990 or 0.995, and the proportion of other metals in it is close to zero. Since the full value below is accepted as 1, it is the closest value to the .990 or .995 phase. It is named 24 carats. It is called genuine gold and it is too soft to be used in jewelry. So do you know how jewelers calculate the price of this gold?
To calculate the price of gold, jewelers first determine the gold’s setting. For this, gold water, and stone are used. For example, if your bracelet is 18 carats, it means that there is 18/24 = 0.750 pure gold. If your bracelet weighs 10 grams, it is 10 × 0.750 = 7.5 grams of pure gold. Get the gold price per gram of $ 55. 55 x 7.5 = $ 1125. In other words, while jewelers buy gold from you (earrings, rings, necklaces), they do not calculate workmanship, but only give you the money of the pure gold in it.
On the other hand, when jewelers sell gold, they add the labor cost of a necklace, earring, ring whatever it is, to the price of pure gold. In general, workmanship is specified as fineness. If the labor cost of the ring is for example 0.570 fineness per gram. that amount of labor as much as the price of gold in grams. For 3 grams of ring 3 × 0.570 fineness = 1.71 grams of gold coins, and it is equal = 1.71 x $ 55 (grams of gold) = $ 94 labor cost. The jeweler adds his own profit and sells the ring to you. So: gram price of pure gold + gram cost of labor + jeweler’s profit = gold ring price. Processed gold is subject to VAT.
14 carat means a 14/24 ratio of 24-carat gold. 14/24 = 0.585 fineness. In other words, the golden ratio in it is close to half. Other metals such as copper, silver, and nickel are found in almost half of their content. 14k gold has a 14k or .585 stamp. If you look carefully at the ring earrings bracelets you can see this 14k stamp or 585 stamps. 18 carat means an 18/24 ratio of 24-carat gold. 18/24 = 0.750 fineness. So the ratio of gold in it is 3/4. Other metals such as copper, silver nickel are found in a 1/4 ratio in their content. 18k gold has an 18k or .750 stamp. If you look carefully at the ring earrings bracelets you can see this 18k stamp or 750 stamps.
22 carat means a 22/24 ratio of 24-carat gold. 22/24 = 0.916 fineness. In other words, the ratio of gold in it is almost pure. Other metals such as copper, silver, and nickel are very rare in their content. The closest gold to pure gold is 22-carat gold. 22k gold has a 22k or .916 stamp. If you look carefully at the ring earrings bracelets you can see this 22k stamp or the 916 stamps. Gold can be sold in various colors such as white, red, yellow. If gold is mixed with copper it becomes red, if it is mixed with silver it will be yellow, and if it is mixed with metals such as platinum or nickel, it will show a white color.
Why Jewelers Calculate Gold Price Differently
Suppose you are on the eve of the marriage. You went to the jewelry store in your neighborhood with your wife, you liked a jewelry set worth 10 thousand USD. You made your bargain and bought the gold. But whatever happened, let’s say you had to sell the gold you bought for some reason urgently. When you go to the same jeweler again, the jeweler said he can give you 8 thousand USD! Trying to overcome the shock you were experiencing at that moment, it would be easy for you to start questioning why you were getting so much damage.
This price difference between the purchase and sale of gold is one of the most important handicaps that annoys small investors and those who want to exchange gold urgently. Well, how is this price difference determined? First of all, it should be said that the price difference between the purchase and sale of gold, also known as “scissors”, constitutes one of the most important sources of income for jewelers.
The jeweler, who gives you a high price while selling gold, will offer a very low number when you want to return the product immediately after you buy it. This price difference will vary somewhat at the mercy of the jeweler, and a little depending on the quality and cleanliness of the gold you want to sell. In addition to all these, factors such as the state and course of the country’s economy and the demand for gold also play a role in the formation of this price difference.
For example, when gold prices are very high, everyone rushes to jewelers to exchange gold. The jeweler either buys gold at a very low price in order not to exchange the gold in his hands or does not change the gold by saying that he does not have gold. As a result, the price difference between the purchase and sale transactions is formed by the combination of very different factors.
How Gold Prices Are Calculated: An Overview of Precious Metals
Gold is a highly demanded investment tool for both individual and institutional investors all over the world. While the price of gold bullion is determined at the London Metal Exchange with a method called Fixing, Gold Forward Contracts preferred by institutional investors are mostly traded in New York COMEX. Before examining in detail the process of determining the gold price and the factors affecting the price, we would like to briefly introduce some precious metals, including gold.
Although silver is used as jewelry, it is mainly used in industrial areas. Therefore, industrial supply/demand outweighs the price of silver. As new technologies affect the industrial uses of silver, they also increase the mobility of silver prices. Electrical household appliances, batteries, medical devices are the main industrial products in which silver is used in conductors. The price of silver is predominantly determined in the London Metal Exchange and the New York Futures Exchange. The physical size and price of silver are expressed in ounce and dollars, just like gold.
Platinum is another precious metal that has predominantly industrial use. Platinum, which is widely used in the automotive industry, was actually much more valuable than gold for many years as a rare metal compared to gold. The 1,900 Dollars / Ons price level, which has been formed with the increase of investor interest in gold in recent years, is quite above the price of 880 dollars/ounce of platinum. The total amount of platinum mined to date is estimated to be around 10,000 tons.
Palladium is also a rare precious metal that has predominantly industrial use. The automotive sector, electronic devices, and dentistry are the main areas of use of palladium. The current price of palladium, which is around 2,270 Dollars / Ons, was at the level of 680 Dollars / Ons at the end of 2015. Half of the total annual production is provided from Russia and 30% from mines in South Africa.
Starting from the year 2020 at the level of 1,520 Dollars / Ons, the value increase from the beginning of the year to the end of October is approximately 25% on a dollar basis. Due to the demand of both individual and institutional investors, who were looking for a safe haven due to the pandemic, there was a big increase in gold prices. The average annual physical gold demand in the world is around 4,000 tons, and the futures markets with much higher volumes are effective in determining the gold price.
How Are Gold Prices Determined?
Gold, one of the most valuable mines of today, is seen as a very important investment tool by people as it is one of the most prominent factors of power and wealth. In fact, gold is often referred to as the “safe haven”. Let’s examine together how the price of gold defined in this way is determined and what is effective in terms of its long-term storage and easy conversion into money.
Before answering the question of how to determine the price of gold, we should answer the question of who determines the price of gold. First of all, it should be explained very well that gold prices are determined not locally, but all over the world. Because gold is traded all over the world. We can even say that gold does not sleep. Because the gold market is traded at different times in each country. It is opened in England when the transaction is completed in China, and in America when the transaction is completed in England. It then reopens in the Far East.
The gold market is in motion 24 hours a day. Therefore, the price of gold is determined by economic movements all over the world. Of course, powerful states have the biggest share in this. The USA is one of these states. The decisions they make and the steps they take are the main factors that determine the price of gold. However, determining the price of gold is not limited to the economies of strong states.
So, what are the factors that affect gold prices? Of course, the most important factor is supply and demand. To put it briefly, at the point where the demand is high, the gold price will increase in direct proportion. But it would be a wrong inference to just link the factors that affect prices to supply and demand. Because the factors affecting the gold market are global geopolitical risks, global inflation, cash flow, and global real interest rates. We can briefly explain each of them as follows:
Gold is the same all over the world, wherever you are, in whatever country you want to cash in. It is the safest investment that can be converted without losing value according to the country. But as the global geopolitical risks increase, the price of gold will also rise, because at that time investors cannot rely on the foreign exchange market and increase the demand for gold. This causes an increase in gold prices.
In economies with high inflation, the purchasing power of money decreases. This does not mean that the price of ice cream has increased, but that money is depreciating. Demand for gold increases in order to preserve the value of money in periods when inflation increases and the value of money decreases. This is exactly the case in global inflation.
Cash flow and gold prices are also directly proportional. As the cash flow increases, the purchasing power increases, and the demand for gold increases. Thus, the price of gold increases. Because the amount of gold will not change, but the price will increase as there is more demand. On the contrary, the price of gold will decrease. In case of a decrease in real interest rates, investors prefer gold because they know that the cost of holding gold will be less. Again, the increase in demand causes the price of gold to rise.
Calculation of the Ounce Price of Gold
Gold, one of the most precious mines in the world, has been used by mankind throughout history. Since ancient times, it has come to the fore as the most important determinant in terms of wealth, welfare, and power of societies as well as people’s personal level. For such reasons, gold is of great importance for people.
Preserving its importance and value throughout history, gold is among the most precious metals in today’s modern world. It is also among the biggest determinants of power and wealth in today’s modern societies. Therefore, the importance of gold for people in today’s modern world is quite high.
Gold, which is used most frequently and intensely in many different areas of life, is also of great importance for today’s modern markets. Therefore, it is among the most important elements of the global economy from past to present. In addition, large differences in the market value of gold in today’s modern world have effects that will cause large fluctuations in the markets.
The price imbalances to be experienced in the gold, which has such great importance in the markets, lead to the occurrence and emergence of major economic problems and crises in many countries around the world. The effects of gold on the markets, especially due to the great impact it creates in the economic markets, lead to the emergence of great crises, and at the same time stand out as the most important and valuable investments in the markets.
The gold market, which has such a great impact in today’s modern world, changes in the direction of supply and demand, as in almost every product in today’s modern world. In the question of why the price of gold ounce constantly changes, the answer is actually here. Because major events and developments in different parts of the world have a direct effect on gold ounce prices in any field.
Apart from this, it stands out as the determining factor in market-wide expectations as well as real events in gold markets. In this context, existing or emerging expectations in gold markets are shaped according to risk environments according to the graphics of international markets. In today’s modern world, economic decisions and market effects in the field of gold, especially in countries with high populations such as China and India, have a direct impact on global gold prices.
Apart from such real situations or events, factors such as gold ounce prices, especially oil prices and foreign exchange values, have direct effects on the shape of gold prices. Along with the possibilities offered by today’s modern technology, especially gold production status and gold production cost have a determining effect on the price of gold. In this context, thanks to today’s modern technology, the gold market movements on a national and international basis can be monitored instantly on the internet.
The General Course of Gold Prices
The gold, which formed the basis of the monetary system between 1870 and 1930, became full with the agreement reached at the Bretton Woods conference in 1944, and the value of 1 ounce of gold was determined as $ 35. Since the early 1970s, the convertibility of the dollar was terminated, and in December 1971, with the Smithsonian Agreement, 1 ounce of gold was increased to 38 dollars. The instability in the money markets kept the demand alive, gold rose to $ 172 / ounce in April 1974, and the oil crisis that started in 1974 fueled this increase.
The recovery in the US economy and the IMF’s decision to put an end to the role of “gold as a scale in the monetary system caused gold to be regarded as a commodity that did not go beyond a precious metal, and this led to a decline in gold prices.” In 1975, when the IMF decided to sell 1/6 of the gold in its hands, the decline in gold prices continued, and gold fell to $ 109 / ounce in August 1976.
There were huge increases in gold prices in the late 1970s and early 1980s. The instabilities experienced in the monetary system and the allegations about the return to the gold standard were the effects of these increases. Gold rose to $ 677 / ounce during this period. However, this effect lasted for a short time and gold prices had a decreasing trend since 1981.
Short-term fluctuations were observed in gold prices due to the political tensions and economic developments experienced in the 1980s. The Iraq-Iran war in the 1980s and the Gulf Crisis in 1990 caused the prices to increase, albeit for a short time, in this period. The 1980s and 1990s were the years when financial markets developed rapidly and gold lost its appeal as an investment tool.
In the 2000s, gold regained the rise recorded in the 1970s. In this period, it is thought that political turmoil and economic uncertainties such as the terrorist attacks in the USA on September 11, 2001, the military operation in Iraq in 2003, the tensions in the Middle East were effective in the rise of gold.
2008 Global Economic Crisis and Gold Prices
While there is an escape from securities in times of economic and political crisis, there is an increase in the demand for gold. The return on gold has a reverse movement with the return on securities. Because gold has a negative correlation with securities, which significantly reduces the volatility of the portfolio. This decrease in volatility affects the performance of the portfolio positively. During the global economic crisis, which started in the high-risk housing loan markets in the United States in July 2007 and spread to the financial markets in a short time and affected the whole world, there were rapid increases in gold prices.
With the news that the American Investment Bank Bear Stearns, which can be considered as one of the first victims of the global crisis, was experiencing financial difficulties, the markets were shaken, and gold reached a record level of 1,011 $ / ounce. Another record was recorded at $ 986 / ounce on July 15, 2008, when the American Treasury and the Central Bank announced their plans to bail out Fannie Mae and Freddie Mac, two giants of the mortgage industry.
After following a low trend for the next two months and dropping to $ 740 / ounce, gold reached $ 905 / ounce the day the $ 700 billion bailouts were rejected in the US House of Representatives. Gold, which experienced a short-term decline after this date, rose again on October 8, 2008, with the coordinated interest rate cut decision of the UK, USA, EU, Sweden, Canada, Switzerland, and China Central Banks and reached 903 $ / ounce (Gold Investment Digest, January 2009).
Price performances of some selected indicators in the 2007/2008 period are quite turbulent. In this turbulent one-year period, S&P 500, Dow Jones Industrial, MSCI indices decreased by 38%, 34%, 45%, respectively, while oil prices decreased by 62%, while gold gained value by 4%.
In 2009, the effects of the global crisis gradually decreased, the stock markets recovered, gold continued to rise and reached the all-time record in November 2009, reaching 1,127 ounces / $. It can be said that the continuous depreciation of the dollar is effective in this exit. The dollar depreciated by approximately 8% against other currencies in the 2008/2009 period.
Factors Affecting the Price of Gold
Gold, which has been used both as jewelry and as a reserve and exchange tool for centuries, has a different place among precious metals. This unique mine, which has attracted the attention of people since ancient times and has been experiencing wars, has become an indispensable part of industrial production and financial markets today due to its easy processing, electrical and thermal conductivity, and superior physical and chemical properties such as resistance to acids.
Gold formed the basis of the monetary system between 1870 and 1930, and in the Bretton-Woods System (1944-1973), it was a key reserve instrument with full convertibility to dollars. Since the beginning of the 1970s, the convertibility of the dollar to gold has been terminated, which has caused it to lose its character of exchange and to be used as a part of individual savings tools and central banks’ reserves.
The 1980s and 1990s were the years when financial markets developed rapidly and gold lost its investment attraction. However, in the 2000s, with the effect of the turmoil in the financial markets and the observed uncertainty environment, it started to attract the attention of investors again, especially in the last period of the global crisis, gold prices have increased at record levels.
Gold is a metal that is resistant to acids, can be found freely in nature, can be easily processed, and is a bright yellow color that is not affected by air and water. It does not rust, does not become dull, and can be easily shaped in its pure state. Due to these superior physical and chemical properties, it is the one with the most important discovery of precious metals. It has dragged people after centuries, causing war and peace. Due to its aesthetics, gold, which sometimes takes the form of jewelry, sometimes as a reserve tool, and sometimes as a currency due to its feature of exchange, has been the most precious metal of all time.
Gold formed the basis of the monetary system between 1870 and 1930, it was used as a means of payment in international commercial activities, and the country’s currencies were represented by a certain weight of gold. The implementation of this system continued until the First World War. In the First World War and 1920s, countries had to print uncontrolled money due to financial difficulties, so the value of different countries’ currencies against each other and gold was freed in a wide band. During the I. and II. World Wars, the gold monetary standard was not implemented, and the relative price balance between countries deteriorated.
As a result of the agreement reached at the conference held in the US Bretton-Woods in 1944, the fixed exchange rate principle was adopted for the country’s currencies and it was accepted that the value of the currency of each country participating in the agreement was determined on the basis of dollars. The dollar was the only national currency that remained convertible with gold. Under the deal, 1 ounce of gold is set at $ 35. Since the beginning of the 1970s, the convertibility of the dollar to gold has been terminated, and this has caused it to lose its character of exchange and to be used as a part of the reserves of individual savings vehicles and central banks.
Supply and Demand Concepts in Gold Pricing
The gold supply consists of gold mined, as well as central bank sales, gold-denominated loans, and scrap gold. The price elasticity of the gold extracted from the mine is extremely low as it depends not on the market price but on the quality of the reserve and extraction techniques. Scrap gold refers to recycled gold from jewelry and other industries. Central banks, on the other hand, sell gold as a reserve management tool.
Although the leading countries in gold production have been South Africa, the USA, and Austria for years, the ranking has changed recently and China has surpassed South Africa, which is the leader in gold mining. Realizing 6% of the world gold production in 1995, China realized 12% in 2008. Now, China has the first place among the gold producing countries and other three follows them.
There are various consumption areas of gold such as jewelry, industry, and investment. The jewelry industry accounts for the most important share of the demand. Demand for jewelry, which constituted 79% of the total demand in 2002, declined to 57% in 2008 with the effect of increasing gold prices in recent years. On the other hand, it is seen that during the years of the global crisis in 2008 and 2009, there was a great increase in the demand for gold-based investment.
In 2008, the investment made in gold bars and coins increased by 45.5%, the demand for exchange investment funds increased by 26.9%, and the total demand by 7% compared to the previous year. The first country on the gold demand list is India. This is followed by China, the Middle East countries, and the United States, respectively. In these countries, the area where gold is used predominantly is the jewelry industry.
While the demand for jewelry is for jewelry in developed countries, the demand for jewelry in underdeveloped or developing countries is for investment purposes as well as jewelry. While the demand for jewelry is intense in Europe, the USA, Japan, and Russia, it is observed that the demand for investment is generally in the Middle East, India, China, and Africa.
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