What Affects the Price of Gold?

There are several factors, including:

Supply and demand. The basic economic principle of supply and demand plays a significant role. When demand for gold increases, for jewelry and industry, but most especially coming from growing investor optimism, prices rise. The total gold supply interrupted two years of decline back in 2022. Demand for gold has been rising in nations such as China and India, where cultural affinity for gold drives demand. Central banks worldwide have also been increasing their gold reserves. The supply of gold is somewhat fixed due to limited mining production and the finite nature of gold reserves. The scarcity helps maintain gold’s value over time.
Market sentiment. Gold is seen as a “safe haven” asset. During times of economic uncertainty or geopolitical tension, investors flock to gold, driving up its price. Recent threats of increased tariffs by the United States have influenced gold prices, but today the market sentiment toward gold is slightly bearish, reflecting strong economic indicators and the anticipation of the U.S. Federal Reserve’s monetary policy decisions.
Inflation. Gold traditionally is viewed as a hedge against inflation. When inflation expectations rise, investors may buy gold to protect their purchasing power, which can increase its price. During periods of high inflation, such as in the 1970s, gold prices have surged as people sought to protect their wealth. However, it’s important to note that gold’s performance as an inflation hedge can be inconsistent. While it has performed well in some high-inflation periods, there have been times when it underperformed compared to other assets.
Interest rates. Real interest rates (i.e., adjusted for inflation) influence gold prices. When interest rates are low, gold becomes attractive as an investment compared to interest-bearing assets. Many economists believe that the price of gold is inversely related to interest rates, though that isn’t always true. In fact, gold prices are driven not by nominal rates (i.e., not adjusted for inflation) but by real rates. What matters for investors is gold and real interest rates, not so much the federal funds rate or nominal interest rate yields.
Currency values. The price of gold is inversely related to the value of the U.S. dollar. When the dollar weakens, gold prices rise as it becomes cheaper for holders of other currencies to buy gold (denominated in U.S. dollars). Even though it is no longer used as the primary form of currency in developed nations, gold continues to have a strong impact on the value of these currencies. There is a strong correlation between gold’s value and the strength of currencies trading on foreign exchanges.
Geopolitical events. Political instability, wars, and other geopolitical events can create uncertainty in financial markets, leading investors to seek the relative safety of gold. Geopolitical events generally have a significant impact on gold prices, making gold a popular safe haven asset for investors during periods of uncertainty. Historical data show a direct correlation between geopolitical events and gold prices, with prices increasing during times of conflict and tension.
Central banks. A central bank is a financial institution that serves as the primary authority responsible for overseeing and managing a country’s monetary system and financial stability. Central banks play a crucial role in a nation’s economy and financial system. They hold significant amounts of gold, and their buying/selling activities impact the market. For example, if a central bank announces a large purchase of gold, just the announcement itself can drive up prices. Ostensibly, central bank motivations are as follows:

They seek to diversify foreign exchange reserves. Holding a mix of assets, including gold, helps central banks spread risk and reduce dependency on a single currency.
Gold is viewed as a store of value, maintaining its value over centuries, unlike paper currencies, which are subject to inflation or devaluation.
During times of economic and geopolitical uncertainty, gold is considered a safe-haven asset, a hedge against financial instability, trade disputes, and political conflicts.
Gold can be used to implement monetary policy objectives, such as influencing money supply, interest rates, and exchange rates.
Countries with trade surpluses and countries with export-oriented economies acquire gold to manage their balance of payments. Gold can be used to settle international trade imbalances and support the national currency.

Smart Success Strategy

These factors often interact in complex ways, making the price of gold dynamic and sometimes unpredictable. With this background and context, what should be our advice to those considering investing in gold?

2024: The Year of Gold

The Golden Rule: He Who Has the Gold Makes the Rules

Gold Prices Hit Record Highs: Who’s Buying?

Clash of the Titans: Weighing Gold and Silver