Gold price fluctuation
1. Introduction
Between 2020 and 2023, gold prices fluctuated moderately, responding to pandemic-related instability and gradual economic recovery. However, beginning in late 2023 and accelerating through 2024 and 2025, gold experienced a significant upward shift, doubling in price within a relatively short period. This movement cannot be attributed to short-term speculation alone; rather, it reflects a combination of persistent macroeconomic pressures and structural market transformations (World Gold Council, 2025a).
Gold plays a significant economic role across a wide range of industries, including mining, jewellery manufacturing, electronics, and financial investment. Unlike many other commodities, gold is often held both as a productive input and as a store of value, which creates distinct accounting challenges. Its market price is highly volatile and influenced by macroeconomic factors such as inflation expectations, interest rates, exchange rate movements, and geopolitical uncertainty.
For entities with substantial exposure to gold, price volatility introduces complexity into financial reporting, as changes in market value may affect asset measurement, profit recognition, and key financial indicators. Under IFRS, the accounting treatment of gold depends on the purpose for which it is held, requiring careful classification and measurement. This paper examines how gold price fluctuations are reflected in financial statements prepared in accordance with IFRS and discusses the broader implications for financial performance and position.
2. Inventory Valuation under IAS 2
When gold is held as inventory, it is accounted for in accordance with International Accounting Standard 2: Inventories (IAS 2). IAS 2 requires inventories to be measured at the lower of cost and net realisable value (NRV). Cost includes purchase costs, conversion costs, and other costs incurred in bringing the inventory to its present location and condition. A decline in gold prices may reduce the NRV of gold inventories below their historical cost. In such cases, IAS 2 requires entities to recognise an inventory write-down, with the loss recorded as an expense in the period in which the decline occurs. These write-downs directly reduce reported profit and may increase earnings volatility, particularly for entities with large inventory holdings. In contrast, increases in gold prices do not generally permit upward revaluation of inventory. This asymmetrical treatment reflects the prudence principle embedded in IFRS. An important exception applies to commodity broker-traders, who are permitted under IAS 2 to measure inventories at fair value less costs to sell, with changes recognised in profit or loss. For such entities, gold price movements have a more immediate and direct impact on reported earnings.
3. Fair Value Measurement of Investment Gold under IFRS 9
Gold held for investment purposes is not treated as inventory but is instead accounted for as a financial asset under IFRS 9: Financial Instruments. Investment gold is commonly measured at fair value, reflecting its role as a tradable asset rather than a consumable input. Under IFRS 9, investment gold is typically classified as either: (i) Fair value through profit or loss (FVTPL), or (ii) Fair value through other comprehensive income (FVOCI), depending on the entity’s business model and the contractual characteristics of the asset. Fluctuations in gold prices therefore result in unrealised gains or losses. When classified as FVTPL, these changes are recognised directly in profit or loss, increasing earnings volatility. When classified as FVOCI, valuation changes are recognised in other comprehensive income, reducing short-term profit volatility but still affecting equity. While fair value measurement enhances the relevance and timeliness of financial information, it also introduces greater volatility into reported results, particularly during periods of sharp gold price movements.
4. Effects on Cost of Goods Sold and Profitability
In industries where gold is a key production input, such as jewellery manufacturing or electronics, changes in gold prices directly affect production costs and the cost of goods sold (COGS). Rising gold prices increase material costs, leading to higher COGS and lower gross margins if selling prices cannot be adjusted accordingly. Conversely, falling gold prices may reduce production costs and improve gross profitability. However, the benefits of lower prices may not be immediately realised if entities hold high-cost inventory purchased at earlier price levels. As a result, the timing of gold price changes can significantly influence reported profitability. Entities that do not actively manage gold price risk may experience substantial volatility in gross margins and operating income, which may complicate performance evaluation and planning.
5. Hedge Accounting under IFRS 9
To manage exposure to gold price volatility, many entities use derivative instruments such as futures, forwards, and options. IFRS 9 permits the application of hedge accounting when specific documentation and effectiveness requirements are met. Hedge accounting aims to align the recognition of gains and losses on hedging instruments with those of the hedged items. When applied successfully, hedge accounting can reduce profit volatility by deferring or offsetting the effects of gold price movements. However, if a hedge is ineffective or does not qualify for hedge accounting, gains and losses on derivatives must be recognised immediately in profit or loss.
Consequently, changes in gold prices influence not only economic risk but also accounting outcomes, affecting both the timing and presentation of gains and losses in the financial statements.
6. Financial Ratios and Revenue Recognition under IFRS 15
Gold price fluctuations can materially affect key financial ratios, particularly in firms where gold represents a significant portion of total assets. Inventory write-downs and fair value adjustments may reduce profitability ratios such as gross margin and return on assets, while also affecting liquidity and leverage ratios. In addition, some entities enter into sales contracts with prices linked to gold market values. Under IFRS 15: Revenue from Contracts with Customers, such arrangements give rise to variable consideration. Entities must estimate the transaction price and apply a constraint to ensure that recognised revenue is unlikely to be reversed in the future. As a result, volatility in gold prices may affect both the timing and amount of revenue recognised, introducing additional uncertainty into reported revenue figures.
7. Conclusion
Gold price volatility has significant and wide-ranging implications for financial reporting under IFRS. Through its effects on inventory valuation, fair value measurement, cost structures, hedge accounting, and revenue recognition, changes in gold prices can materially influence reported earnings, asset values, and financial position.
These findings highlight the importance of sound judgment in classification and measurement, consistent accounting policies, and comprehensive disclosures. For entities with material exposure to gold price risk, effective risk management and transparent financial reporting are essential to ensure that financial statements faithfully represent economic reality.
References
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