What the record gold price actually reveals: Experts

What makes this gold bar a milestone, however, is the fact that it is now worth a million dollars a piece: the Hollywood-famous gold bars that weigh more than 27 pounds (400 troy ounces, to be exact).

People love round numbers, especially big round numbers with six zeros. Therefore, this number attracts the public’s attention, even though most people would never actually buy what the price represents.

Whatever the case, we have a new way to think of a million dollars as a physical asset: these yachts, these houses, and now this gold bar.

As iconic and influential as the format may be (known in the industry as “London Good Delivery Bars”), private buyers tend to opt for smaller units such as kilograms, 100 grams or an ounce.

Gold experts told Business Insider that the real driving force behind prices is not collectors buying bars and coins at Costco, but central bankers around the world. The prospect of interest rate cuts – which are imminent in the US – generally boosts gold because it reduces the relative attractiveness of other assets such as Treasuries.

“I can tell you that FOMO has not yet penetrated the gold bullion market as one might expect given the rise from $2,000 to $2,500,” Jonathan Da Silva, a trader at Kitco Metals, said in an email.

And despite gold’s popularity in the U.S., physical gold is attracting even greater interest among non-Western consumers, says Stephen Flood, director and co-founder of GoldCore, a precious metals services company based in Ireland.

But experts tell Business Insider that this trend also has another side.

“Demand is increasing, but currencies are devaluing more,” Flood said.

Because gold is considered a safe haven, its cash price also rises when the real value of currencies such as the US dollar, British pound and the euro falls. In other words, a rising gold price is another sign that the purchasing power of the dollar is declining.

The value of a currency can fall for a variety of reasons, primarily inflation, but also due to geopolitical risks and the willingness of other countries to hold it in reserves.

In 2000, the dollar accounted for over 70 percent of the world’s reserve currency; today it is less than 60 percent. According to the International Monetary Fund, however, gold reserves have increased sharply since the major financial crisis in 2008.

Owning physical gold is a way to protect assets from currency devaluation without taking the risk of investing in other financial instruments, said Jacob Diaz, CFO of Genesis Gold Group.

“As long as there is room for the dollar to depreciate, there is room for gold to appreciate,” he added.

In fact, six years ago, you could get two Good Delivery gold bars for a million dollars.

Despite the unusually strong performance of gold prices this year, the experts BI spoke to said long-term investors are much more interested in protecting their assets from downside risks.

High-net-worth buyers of precious metals (those who might buy a 400-troy-ounce bar) “want to get out of fiat money rather than gain more of it,” Da Silva said.

“Perhaps they see gold as a means of preserving the value of their life’s work for future generations,” he added.