What Drives the Price of Gold?

If you’re new to the world of gold investments, it’s important to understand the numerous influences that fluctuate gold’s price. In this guide, we explore the different factors that drive the price of gold, including the US Dollar, gold production, gold demand, central bank reserves, rising interest rates, and geopolitical factors.

Value of the US Dollar

Gold is considered a dollar-denominated asset, which means its value is priced in US dollars. Like other dollar-denominated assets, gold’s price is generally inverse to the value of the dollar. This means that when the US dollar decreases, the value of gold increases. In other words, a stronger US dollar keeps the price of gold on the low side, while a weaker US dollar drives up the price of gold through increased demand.

This is why gold is considered a hedge against inflation. In situations where the value of the US dollar decreases, investors have less purchasing power which means they can buy less gold per dollar. This naturally increases its intrinsic value. When inflation is high, gold tends to remain stable or even increase in price.

A good example of the relationship between the US dollar and gold’s price can be seen by looking at the last year. Gold’s price was at an all-time high on 27 December 2023 when it traded at $2,135 per troy ounce. At the same time, the US Dollar Index was at its second-lowest level of the year.

Read more: Troy Ounce: Definition, History, and Conversion Table

At the same time, if the exchange rate of the US dollar relative to other currencies decreases, investors outside of the US will be able to buy more gold with their currency. This is another way that a decrease in US dollar value can increase demand and drive up real gold prices.

Using the same example as before, on 27 December 2023, the exchange rate for the euro was $1.11 US Dollars. This was the highest level for the euro since mid-year and coincidentally (or not so coincidentally), it happened at the same time that gold reached its all-time high.

Gold production

There is only so much gold in the world. Because it’s a finite resource, the cost of prospecting and mining physical gold gets more expensive with time. “Easy” gold has already been mined and miners have to dig deeper to access quality gold reserves, dealing with more hazards and environmental impact. Essentially, this means it now costs more to get less gold than before. At the same time, when gold demand is higher than supply, the price will naturally increase.

It’s uncertain yet whether or not we’ve reached peak gold, the point where gold production ceases to grow and it becomes increasingly difficult for production to meet demand. In 2020 and 2021, gold mine production was around 3,000 metric tons per year, down from 3,300 metric tons in 2018 and 2019. Some sources believe that by 2050 it will become unsustainable to continue mining gold. When this happens, it can be expected that gold’s price will soar.

Demand for gold

The laws of supply and demand apply to gold just as they do for anything else. When gold is in high demand, its price will increase. There are different demands when it comes to gold: demand for jewelry, for investments, and for industrial uses.

Read more: What are the Best Gold Bars to Buy?

Demand from jewelry

Jewelry accounts for nearly half of all gold demand, with China, India, and the US being the largest consumers of gold jewelry in terms of volume. Buying gold jewelry is one of the most common ways people interact with gold - when demand for gold jewelry increases, so can its price.

Despite it being such a common way to buy gold, jewelry demand has less of an impact on gold prices than other forms of gold. This is because people are usually buying and holding gold jewelry for years.

Demand from gold exchange-traded funds (ETFs)

Another way people buy gold is through exchange-traded funds (ETFs). These are securities that invest in gold bullion or mining companies and issue shares that can be bought and sold just like stocks. ETFs allow people to invest in gold without having to possess the physical metal itself (which has its drawbacks - read more here: Why Buy Gold? Reasons to Invest in Physical Gold Bullion)

Demand from gold ETFs can affect gold’s price. When more people invest in gold ETFs, its price tends to increase.

Demand for industrial uses

A relatively small percentage of gold demand is reserved for technology, industrial, and production uses, such as electronics, healthcare, and space exploration. As with the other examples, when industrial demand for gold increases significantly, more gold is needed. This increases the value of gold.

Central bank reserves

The world's central banks hold gold reserves to diversify their holdings and safeguard against currency risks. When central banks increase their gold reserves, it creates additional demand for gold in the market and can drive up its price.

See: Why Central Banks Buy Gold

At the same time, central banks can influence market sentiment. So if people see central banks, particularly those from major economies, actively buying gold, it can signal to investors that gold is a valuable asset worth holding. This can also increase demand and drive up gold prices.

According to Bloomberg, the world’s central banks have been buying the most gold since the early 70s. In 2022, central banks’ gold buying surpassed its 50-year record and in 2023 the trend continued. According to the World Gold Council, 2023 was the second year in a row that central banks added more than 1,000 tons of gold to their total reserves.

Interest rates

Interest rates also have an influence on the price of gold. Like the US Dollar, their relationship tends to be inverse, meaning gold prices tend to increase as interest rates fall and vice versa. That said, the relationship is a little more complicated and doesn’t have a direct correlation.

In March 2022, the Federal Reserve raised interest rates in an attempt to ease runway inflation. Despite the highest interest rates since 2007, gold’s price still hit an all-time high in December 2003.

Usually, however, higher interest rates indicate a strong economy. In this situation, investment demand can increase as the market turns bullish and investors feel more confident buying higher-risk assets like stocks. When this happens, the price of gold and other precious metals tends to decrease as demand for other assets increases.

On the other hand, there are moments in a high-interest-rate environment where investors will want to avoid higher risk assets. This includes situations with poor consumer confidence or weak job reports. In that case, the price of gold is unlikely to be affected by interest rates.

In the end interest rates tend to have an inverse influence on gold prices, but only when paired with other economic factors.

See more: What is the Gold Silver Ratio? Gold Silver Ratio Chart

Geopolitical factors

Geopolitical factors can also drive the price of gold. Usually, gold will move in the same direction as geopolitical tension. This means that as tensions increase, the price of gold will also increase. Because gold is considered a safe-haven asset, people will often turn to it during periods of economic uncertainty or geopolitical tensions. This increases demand and drives up the price of gold.

This exact situation played out in early 2022 at the time of the Russia-Ukraine conflict, and again in late 2023 with the Israel-Hamas conflict. On 26 October 2023, the day before the Hamas attack, gold’s price was at $1,834.60 per troy ounce. Just 20 days later it had already increased by nearly 9% to $1,995.80 per troy ounce.

An important note when speaking about the relationship between gold price and geopolitical factors is that it usually only has an effect when the US is involved. Because gold’s price is so heavily tied to the US economy, overseas tensions that have less of an impact on the US may not necessarily affect the price of gold.

Who determines the price of gold?

Gold’s price is largely determined by the forces of supply and demand in the global marketplace. Unlike other commodities, gold doesn’t have a single, centralized exchange where all transactions take place. Instead, its price is influenced by a variety of factors and determined through trading on multiple platforms and markets around the world.

That said, below are some key influences on gold’s price:

• London Bullion Market Association (LBMA): The LBMA is a major over-the-counter (OTC) market for trading gold and silver. It sets the benchmark gold price twice a day through auctions known as the London Gold Fixing. This price-setting process involves representatives from major banks agreeing on a price at which they’re willing to buy and sell large quantities of gold. The LBMA’s gold price is published via the ICE Benchmark Administration (IBA), which consists of multiple banks, an oversight committee and a panel of internal and external chair members.
• Futures Exchanges: Gold futures contracts are traded on several commodities exchanges worldwide, including the Commodity Exchange (COMEX) division of the New York Mercantile Exchange (NYMEX) in the US and the Tokyo Commodity Exchange (TOCOM) in Japan. Prices established in futures markets can influence gold’s spot price and vice versa.
• Central Banks: Central banks hold significant gold reserves and may periodically buy or sell gold as part of their monetary policies. As such, central bank purchases can impact the supply of gold in the market and influence prices.
• Investor Sentiment: Like other financial assets, the price of gold is influenced by investor sentiment, market speculation, and economic factors like inflation, interest rates, currency movements, geopolitical events, and overall economic conditions. Changes in these factors can lead gold investors to buy or sell gold and affect its price.

Overall, gold’s price is determined by a complex interplay of various factors and participants in the global marketplace rather than being set by a single entity.

How volatile is gold?

New investors are always wondering: how volatile is the price of gold?

Historically, gold has shown lower market volatility compared to other commodities and asset classes like stocks and bonds. This is why buying physical gold is always an essential part of a diversified portfolio.

That said, the precious metal can still experience significant price fluctuations. Gold’s volatility is mostly seen in the short-term, when its price can be subject to sharp and sudden fluctuations especially during periods with a stronger US dollar, real and expected inflation rates, central bank purchases, and increased gold market demand.

Despite any short-term volatility, gold is often considered a relatively stable and reliable store of value over the long-term. Its price is less influenced by short-term market fluctuations and more by factors like inflation, currency devaluation, and overall economic stability. This is why gold is often used as a hedge against inflation and other economic uncertainties.

If you’re new to the world of gold investments and worried about a temporary drop in gold prices, don’t be - the price of gold tends to rise again after a relatively short period of time and you’re likely to see long-term returns on your investment.

Invest in gold today

Of all the assets in all of time, gold remains one that is stable, reliable, and a safe haven during times when other assets tend to depreciate. If you’re ready to make an enduring investment that both preserves and grows your wealth over time, buying physical gold is best.

As one of Europe’s leading precious metals companies, StoneX Bullion has an impressive range of investment-grade gold bullion bars and coins from the world’s most prestigious and highly-regarded mints. We also offer investments in silver, platinum, and palladium. Whether you’re looking for gold bullion bars to store your wealth or feel called to the numismatic value of gold coins, you’ll find it here at StoneX Bullion.