Energy, gas and fuel. What all affects the price of gold?
16. 11. 2021
What is the real price of gold? Why does it retain value and why does its price rise with the rate of inflation? Precious metal is often said to be a safe haven for finance and a store of value. It protects your money in economic crises while securing other assets in your portfolio. You must have heard this before, and if you put money in gold, you also take advantage of it. And that's good.
In the following paragraphs, we will look at why the price of gold actually rises with inflation and what factors are involved.
To begin with, it is important to say why people generally see gold as an attractive investment. The answer is simple. It's rare. Nowadays, we know approximately how much gold there is in the world, how much has been mined and what its supply is. In combination with the fact that it is not easy to get to the precious metal, it has always fascinated mankind and anchored itself as a universal traditional currency. Simply said: When there is little of something, people naturally desire it.
A slightly deeper answer lies in the question of its mining. For this, mining companies need various resources, the price of which – often due to their limited quantity – is constantly rising. One gram, kilogram or tonne of gold also hides a large amount of electricity, gas, human energy or fuel.
The numbers say it all
According to gold.org, 3,500 tonnes of gold were mined in 2020 and 1,300 tonnes of gold were recovered from recycling. According to Dell research, for every kilogram of gold, 20 tonnes of CO2 are produced and approximately 48 MWh of energy are consumed. These figures do not include data from further processing of gold (spent on the production of ingots, coins, ...), however, according to Galaxy Digital Mining, annual energy consumption in the gold industry is around 240 TWh.
Further figures are published by DePaul University, and based on their conclusion, the amount of CO2 released should be close to 35 tonnes per kilogram of gold – i.e. data from the jewellery industry, which accounts for about half of the entire gold industry. When a kilogram of gold is recycled, 37 tonnes of CO2 are released and 31.3 MWh of energy are consumed. According to the study, as much as 260 TWh of energy (260,000,000 MWh) were consumed in gold processing in 2020. Just to give a sense of scale, the average Czech household consumes approximately 2–3 MWh of electricity per year.
Energy prices are rising
It is clear from the figures given above that an incredibly large amount of energy falls on the precious metal. Energy prices are a very hot topic at the moment. Over the past year, the energy market has resembled an overcrowded pressure cooker, and it was only a matter of time before it exploded. In the Czech Republic, its explosion meant, for example, the collapse of the Bohemia Energy group, which brought new advances on energy payments in astronomical amounts to the former clients of this energy company.
In order to show how the energy market has changed over the past year, we will use figures from the kurzy.cz portal. Based on the data presented on this portal, the price of 1 MWh of electricity is around USD 135 and the price of 1 MWh of natural gas is around USD 20. Compared to 2020, the price of natural gas has been increased by 93% and the price of electricity by 175%. A simple calculation makes it clear that as energy prices rise, there will also a be change in physical gold prices. In its mining, natural gas and electricity are used in an approximate 50 : 50 ratio. The advantage of gas is its lower price, while electricity is cleaner and easier to handle. So, if we calculate the cost of energy per kilogram of gold, in 2020, the costs of consumed energy were USD 1,413 and in 2021 it is already USD 3,696. The difference is USD 2,283 per kilogram. In other words, just due to the effect of the rise in energy prices, one kilogram should be more expensive by almost USD 2,300.
Electricity and natural gas are not the only factors influencing the price of gold. It is also being pushed up by prices of fuel, which is consumed in the transport of gold from mines in hard-to-reach locations and in the transport of gold ingots, jewellery and coins to customers. Over the past year, the price of diesel and petrol has risen by approximately 32%. Due to the high CO2 production, the price of gold processing is also influenced by the price of emission allowances. It is clear that most mining companies and refineries have not reflected these costs into the price yet, however, it is only a matter of time before they do so, because in the long run such cost increases are unsustainable for companies, especially in a period of extreme demand for physical gold.
Prospects for the future
The data clearly shows that gold has a steep growth path ahead of it. Reduction of energy or fuel prices is very likely out of sight, which is why we can expect the price of gold to rise. This assumption is based on a purely pragmatic calculation of the steep rise in energy costs for miners and processors. However, it is also necessary to consider the constantly mentioned economic and political aspects, starting with inflation and ending with the economic instability caused by the covid crisis, which are driving up the exchange price of gold itself. According to the analysis of MKS PAMP Group, the gold price should reach USD 2,200 per ounce next year.
Also due to rising energy and fuel prices and other costs combined with rising inflation, this is one of the last chances to buy gold at such a favourable price. The moment when the gold price is similarly low is unlikely to come again. It is worth talking to your financial advisor about how to invest in gold so that it is a safe haven for you too. Find out how you can overcome the upcoming crisis in peace and security.