(intriguing orchestral music) – [Narrator] Over the past few months, the price of gold has been going haywire. You can see it on this chart. As the coronavirus pandemic
took hold in March, the price crashed, alongside stocks, and then quickly regained. Then, a frenzy of investment
drove up the price to all-time highs. On August 4th, it shot
past $2,000 a troy ounce for the first time ever, before another week of big swings. This volatility is
drawing both main street and Wall Street investors
seeking fast gains and leading some analysts to
call it a modern-day gold rush. But these big moves call into question gold's reputation as a safe-haven asset. – Prices can move at a moment's notice without fundamental reason more.
More volatility means more
risk, and that means gold isn't the haven, necessarily,
that some people think it is. – [Narrator] To you understand
why the price of gold is so volatile, first
you need to understand how gold trading works. Like other precious metals, the price of gold is
tied to physical assets. – The physical gold
market involves mining, refining, travel and sale. – [Narrator] Gold mining
happens on every continent except Antarctica. And the top-producing countries are China, Russia, and Australia. This work adds up to about 2,500 to 3000 metric tons of gold each year. This metal is then smelted and refined before being turned into bars, coins, and other products like jewelry. The gold is then shipped around the world, often stashed in the cargo
of commercial aircrafts. Much of it is sent to London. Mostly hidden beneath
the streets of the city, the Bank of England's vaults hold around 400,000 bars of
gold worth over $260 billion. – The physical trading of gold in London is done behind closed doors
and in secret by a few banks.
So, these banks work with the London Bullion Market Association to set the physical price
of a troy ounce of gold, and that price determines how
much gold is worth everywhere. – [Narrator] The gold
stash in London is rivaled only by the Federal
Reserve Bank of New York, which holds the world's
largest hoard of physical gold. In other places around the world, gold is a common investment as well. – In a lot of cultures in Asia, people see gold as something
that's having prestige and intrinsic value
that can be passed down from generation to generation.
That can be a big source
of physical demand for jewelry and bars and coins. – [Narrator] When individual
investors want to buy in, they generally have a few options. They can purchase physical
gold in person from dealers or on websites like APMEX. They can bid on thousands
of dollars worth of gold through eBay. And they can buy exchange-traded funds that hold physical metal. The biggest of these is SPDR gold shares, which is traded on the
New York Stock Exchange. But this is just the physical market. Gold is also traded on
a whole different market that is tied to commodity futures. This takes us back to New York, where gold futures trade
on the COMEX division of the New York Mercantile Exchange. Futures are contracts which
lock the price of a commodity that will change hands at
a specific future date. A standard futures contract
is tied to 100 ounces of gold worth over $200,000,
depending on the market. – The most actively traded
month for gold futures right now is December because that's
a month people expect the pandemics issues to
maybe be resolved by, and it's a month around the November's presidential election.
A lot of people are very
nervous about the outcome of that election and
that it might be delayed, so they're using these
December gold futures to give themselves options and protect against market turmoil. – [Narrator] But gold has slipped lately after a long run-up, a reminder that momentum in
this market can change quickly. Still, this hasn't stopped gold bugs. And there are a few reasons why people continue to pile money
into the metal right now. For a lot of investors,
it started in March, when mines, refineries and airlines shut down across the world, upending the system usually used to move gold across the
Atlantic and stabilize prices. But when the pandemic hit, investors feared there wouldn't be a way to physically move gold
between the markets.
This caused physical
gold purchases to soar, leading to a severe shortage that drove up the price of futures. But there are other reasons too. – There are a lot of people
who are very bullish on gold and think it's an alternative currency that provides a hedge against inflation and is very attractive when
interest rates are low. Many bulls are piling into the sector because they think the Federal Reserve and other central banks are eroding the value of paper money by pumping a ton of cash into
the global financial system to support the economy.
– [Narrator] The increased activity is contributing to momentum trading, driving a frenzy for
gold, similar to stocks. But if inflation doesn't materialize, the momentum that gold
is seeing could unravel. – Analysts say the current
trading environment is extremely risky. People say all of the economic
and political instability could last for a lot longer than we think. At the same time, if the economic recovery goes better than expected, if there's a coronavirus vaccine more quickly than we think,
gold could have some issues. – [Narrator] This means
that gold could face more volatility moving forward. (light orchestral music).