How Does Gold Make Money?

You’ve seen it a thousand times. Maybe you can’t stand the color. Maybe you love the stuff. But one thing easy to note about Gold is that irrespective of which government is in power, irrespective of the amount of blood on the streets, irrespective of which civilization rules the waves, Gold is worth something.

gold makes money

Image source: Jo Naylor

The first thing to clarify is that prices are just numbers. The price of everything is just a number. Sometimes a price goes up because there isn’t enough of it. Sometimes a price goes down because there is too much of it. However, there are consistent cycles, often marked by war, where the unit you are using to price everything else goes to pot. Where the dollars, pesos, or Deutschmarks in your pocket become utterly worthless.

It is at times like these that Gold makes money.

This is the spiel you often get on the internet. It is non quantitative and makes Gold feel like a punt, an insurance policy against holocaust, a bet on a zombie apocalypse.

This is partly true, but barely.

Gold is a function of two commonly traded variables

  1. Interest rates are the cost of money. Since the world’s current global currency is the US Dollar, it is currently US interest rates that influences the US Dollar price of Gold. Gold yields nothing, so the lower the yield on everything else, the more likely Gold will rise in price.
  2. Inflation is many things, but for our purposes, let’s think of it as the decline in value of money. Again, if we talk about US inflation, we get the domestic decline in value of the Dollar. Yesterday a dollar bought 15 slices of bread. Today it buys 14 slices. Your currency is worth less and Gold is worth more.

These two things together are the real interest rate. It is “real” because the cost of money is being adjusted for the decline in value of what it can buy.

The real interest rate is reflected in a slice of government debt called Treasury Inflation Protected Securities, or TIPS.

Gold is an estimate of the future

Gold is inversely related to the real interest rate or TIPS. Therefore if the real interest rate is the interest rate minus inflation, Gold is correlated to inflation minus the interest rate.

Here is the 5 year United States TIPS charted against the gold price flipped upside down. Its a little out of date, the gold price is rising and the TIPS yield is declining.

gold makes money through the real yield

To reiterate the logic, when inflation, or the value of money is going down, Gold goes UP.

When interest rates, or the cost of money is going down, Gold goes UP.

It just happens that these things tend to happen when either (1) a government / civilization / state collapses or (2) when an economy is hitting the skids.

Where we were

Gold had a huge rally 2001 to 2012. The global economy saw a billion Chinese people finally fully rejoin the workers of the world. They became included in the subset of people who might make your toaster or your iPhone.

Their government, other Asian governments, and the governments of the oil economies, got into a cycle of saving the money they were earning, and lending it to the United States, with its insatiable hunger for debt and the contents of Wal-Mart.

More workers meant less inflation. More savings meant lower interest rates. Bond yields saw a secular decline and Gold enjoyed a secular rally.

Note that when the orange line above is below zero, having cash was losing you money. The market was efficient though, it predicted the peak in negative real rates. Real rates bottomed in 2013, the Gold price peaked the year before.

Where we are

2012 to 2015, the economy made a little progress, building on its bottom in 2008. In response to that, the United States Federal Reserve has tried to move back to a more normal interest rate policy. This has weighed on the price of Gold.

gold price makes money us dollars

The risks to that move are why Gold is acting better again. People think the Fed is going to fail. The market thinks that they will join Europe and Japan in reversing course.

In fact, Europe and Japan have negative interest rates, they are charging banks for the privilege of having cash. This in itself is causing instability in the banking sector. Which brings me to the Gold price in Euros.

The US Dollar Gold price is risky. The US economy is one of the strongest in the world. If anywhere is going to have higher interest rates, it is going to be the United States.

That is not the case in Europe.

gold makes money euros

This is the Gold price in Euros. Remember they are charging their banks for having cash. But you can’t charge someone for holding Gold.

In a technical sense, notice how the lows at the end of 2015 were higher than the lows in 2014. A feature of a rising trend is rising lows.

How I’m going to trade Gold is through Bullionvault, it is the largest online marketplace to buy and sell gold. Its even cheaper than using an ETF.

Wherever interest rates are negative, there is a huge incentive to buy Gold. That is how you can make money in Gold. It is the most proven way to go short everything else out there.


Don’t want to buy gold? That’s fair enough. But don’t let that stop you investing in your pension. Read why investing in your 401k or retirement fund is one of the smartest things you can do.

Want to generate some cash? Well then read up on Alibaba & Amazon and flog all your stuff first!

Yuen Lo


  1. I appreciate you going over why gold is worth so much, rather what affects the price of gold. I will admit that a lot of what you wrote went over my head. I have just always had a hard time understanding interest rates, but I think I get the gist of what you are saying. In any case, it is good to know that when interest rates are negative it is a good time to buy gold. That one tip should help me a lot.

  2. I think it’s so interesting that gold is so stationary when it comes to it’s value. It’s no wonder that people prize it so much! With all of this inflation, it stays consistent. I might have to try selling some. Thanks for sharing!

  3. I am glad you covered the topic of gold and you have explained it well. However, from a wealth building standpoint I don’t think it is wise to buy gold. Buying gold may make you feel more secure during unstable economic times, however, it is an ineffective investment strategy because it is akin to trying to time the market. Trying to time the market is akin to gambling, not investing. So, what is a more effective wealth building strategy than buying gold? Investing is successful, stable, and growing companies that make products. These companies will will continue to have a high customer demand in good times and bad. Economies stall, governments stutter, but in the end, life goes on. People need to eat, drink, have housing, transportation, clothing, and demand other luxuries. So, if economies get really bad, people will be trading in their gold to purchase the type of essential products mentioned above. Therefore, buy gold out of fear but build wealth by investing in the best companies worldwide. Any comments or suggestions?

  4. Hi Ryan – you are spot on that holding a selection of long term companies are the best way to get your money working for you. However unfortunately my guilty secret is that I do try to time the market! I’ve lost money doing that and I’ve made money doing that. The way I think about it, six years out of seven, equities is the best place to be, so clearly we need to be long term equity investors. However one year in seven we have to assume a 25% drop. Down 25% is normal, 2007-8 was crazy and abnormal. If you suffer that drop then you don’t need me telling you that your future lifestyle will feel the pain. At the back end of the cycle it makes sense to take some mitigation, own more bonds, more cash etc. The key thing is its not all or nothing, its about the whole portfolio. Gold is a funny one as it can drop 10% in a day – on good economic news! But as a way to bet on equities down, bond yields down, inflation up, it is unrivaled. To say that differently, at the end of the cycle having a chunk of money in gold for a couple of years is risk management. I don’t give investment advice (disclosure!) but I suspect the fed will raise rates a couple times, that will cause a normal excess correcting recession, and that will be when to sell the gold and buy back the great companies you still like. But to your point, quality stocks always, but being particularly diversified for the next two years is sensible investing. Oh but I’ll reiterate this, sell gold when the recession actually arrives. I am only ever a short term (1-2yr) gold investor.

  5. It’s fascinating that the price of gold changes with the economy and the location. Knowing when and where to sell your gold sounds very important if you have some gold that you want to get rid of. I would imagine that you would also want to research where to sell your gold as well when you are looking to sell your gold.

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