Why Do Gold Prices Plummet? Causes and Economic Factors

When we look at gold’s historical prices, we see that it’s gone through clear periods of both rising and falling. So what makes gold prices fall?

In this article, we discuss the various factors that can cause gold prices to drop, the reasons behind gold’s most recent price drop, and when’s the best time to buy gold.

How supply affects gold prices

Gold’s supply behaves differently to most other commodities. Even though gold mines are continuously operating, they only add a small amount of new metal to the global supply each year. Even with modern mining techniques, global gold production only increases the total above-ground gold stock by about 1-2% each year.

Gold is also different to other commodities in that it doesn’t get burned (like oil) or consumed. Less than 10% of mined gold goes towards technology & industrial purposes, and the rest of it just sits in vaults, jewellery boxes, and central bank reserves, ready to re-enter the market whenever the owner decides to sell. Because of that, nearly all the gold ever mined still exists today. If you were to melt all this gold into a single block, it’d form a cube about 23 metres wide on each side.

Read: How is Gold Formed and Where Does it Come From?

With so much gold still in circulation, supply is relatively static and slow-moving. This is why gold isn’t typically seen as a speculative asset. People don’t buy it in the hope of seeing explosive short-term returns, they buy it for protection against inflation, currency devaluation, or times when less tangible assets fall.

That said, mining technology can influence the gold market. For example, new techniques like cyanide leaching, heap leaching, and bio leaching make it more economically feasible to extract gold from lower-grade ore. Other technical advances can make gold mines more efficient, leading to increased production of gold. All of this can put downward pressure on gold prices if demand doesn’t keep up with supply.

Still, compared to other commodities like oil or grains, gold’s supply is relatively consistent. For that reason, supply doesn’t affect gold prices so much as demand and investor behaviour.

How market conditions affect gold prices

One of the main drivers of gold prices is investor speculation around central bank policy, inflation, and stock market performance.

In 2014, for example, when the US Federal Reserve announced that it would end the stimulus programs introduced after the 2008 financial crisis, gold prices fell sharply. Inflation was also low at the time, so gold’s ability to act as an inflation hedge wasn’t particularly needed. Many investors had confidence in the recovering economy and turned their attention towards the stock market instead. Why sacrifice potentially massive returns in favour of a long-term store of value?

The late 1990s was similar. Gold hovered in the $360 range as investors turned their attention to technology stocks amidst the dot-com boom. But those who held onto their gold through recessions, geopolitical shocks, and market crises saw their investment rise again. So falling gold prices, while they exist, often reflect temporary changes in expectations rather than permanent shifts.

Read More: What Drives the Price of Gold?

Why do gold prices plummet?

There are several factors that can cause gold prices to fall. These include:

Excess supply or reduced demand

Because gold isn’t consumed, when investors, funds, or central banks sell their gold at once, it can temporarily flood the market. If there’s not much demand at the same time, prices tend to fall.

Shifts in investor sentiment

Large institutional traders and hedge funds can have a big influence on the gold market. When optimism is high, like during periods of economic growth or rising stock markets, investors tend to rotate out of safe-haven assets like gold. If major investors decide to sell, prices can drop even if economic fundamentals haven’t changed.

Stronger U.S. dollar

Gold and the U.S. dollar have historically had a negative correlation, meaning they move in opposite directions. There are a few reasons for this. When the dollar strengthens, international buyers need more of their own currency to buy gold, making it more expensive.

A stronger U.S. dollar also makes investors more confident holding dollars as an alternative store of value, reducing demand for gold and causing prices to fall.

Learn More: Is There a Correlation Between the US Dollar and Gold Prices?

Rising interest rates

When interest rates rise, bonds and other income-producing assets become more attractive. Since gold doesn’t pay interest, investors tend to move their money out of gold and into assets that generate income.

Low inflation or deflation

Gold is valued as a hedge against inflation, so it can become less appealing during periods when consumer prices are stable. At these times, investors often look towards growth-oriented assets rather than those that provide protection.

See: Exploring the Role of Gold as an Effective Hedge Against Inflation

Geopolitical stability

Gold is a safe-haven asset that thrives during periods of uncertainty. So when the world feels stable, investors tend to reduce their safe-haven holdings. We’ve seen this happen in periods of stability after major crises like the Great Recession and the COVID-19 pandemic. Once the initial shocks wore off, gold prices started to slowly fall as markets recovered and investors turned to equities and riskier assets.

Could gold prices continue climbing forever?

Probably not. Gold might continue trending upwards over the long run, but it’s unlikely to keep rising endlessly without interruption. That’s because, just like any other asset, gold moves in cycles. It experiences periods of strong growth followed by pullbacks, corrections, or even extended bear markets.

Gold’s price is ultimately governed by supply and demand. Even though supply doesn’t change much, demand can shift quickly. When demand rises, like during inflation, economic uncertainty, or currency devaluation, gold prices tend to increase. When demand falls, like during periods of stability or when other investments look more attractive, gold prices drop.

Other factors can influence these cycles:

• Interest rates: High rates make yield-bearing assets more attractive compared to holding gold
• Inflation: Gold often rises during inflationary periods but can stagnate or fall when inflation is low
• Currency strength: Stronger U.S. dollar often weighs on gold prices
• Geopolitical events: Political crises often support higher gold prices while stability reduces demand
• Economic conditions: Strong economic growth can shift investor interest towards stocks and away from safe-haven assets.

So even though gold has shown an upward trajectory over decades, that path hasn’t been a smooth, consistent upwards motion. When you look closer, you see that the long-term gains are interrupted by short-term volatility as investors cycle through waves of optimism and caution.

What factors contributed to gold’s recent price crash?

Gold has seen a massive bull run over the last couple of years, but in the last few months it’s been a bit more volatile than usual. Now that we’ve understood the forces behind gold prices we can see why this has been happening:

• Stronger U.S. dollar: Gold and the U.S. dollar tend to move inversely. In the last few months, we’ve seen the dollar rise, making imported gold more expensive in overseas countries and reducing demand across Europe and Asia.
• Profit-taking after record highs: Gold reached all-time highs this year, leading many large investors to lock in their gains by selling their holdings. With institutional funds reducing their gold exposure, selling pressure increased and led to a short-term pullback. This kind of profit-taking is normal after strong rallies and doesn’t necessarily signal a long-term reversal.
• Reduced geopolitical risk premium: Gold thrives on uncertainty. Over the past year, geopolitical tensions boosted demand for gold as a safe-haven asset, adding a ‘risk premium’ to gold prices. But recent breakthroughs in trade discussions and easing tensions in several regions have decreased that fear-driven buying.

When is the best time to buy gold?

Just because gold prices have fallen, it doesn’t mean that it’s not a good investment. At the same time, don’t try to wait for gold to drop even lower before you buy – as they say, time in the market is better than timing the market.

That said, let’s look at some tips around when is a good time to buy gold:

Buy when the economy is strong

As we’ve learned throughout this article, gold performs best during periods of economic uncertainty. So during periods of economic growth, gold prices tend to dip as investors shift their attention to stocks and other higher-return assets. This means that some of the best long-term buying opportunities happen when gold is out of the spotlight and prices are naturally lower.

Buy during certain times of the year

When we look at historical price data from the last 50 years, we see trends that repeat enough to be useful (though they are not guarantees):

• Gold has frequently posted gains after the New Year, as investors rebalance their portfolios
• Gold prices have tended to be slightly lower around July, offering favourable buying windows before demand increases again in autumn.

These patterns by no means repeat every year, they just give a general sense of when gold has historically been cheaper in the past.

Buy consistently over time

Since markets are unpredictable, many people choose to buy gold in small amounts on a regular basis. This is known as dollar-cost averaging, and it can help smooth out price swings and avoid the risk of buying all your gold holdings at an unfavourable time.

Buy when others aren’t

Because gold demand surges during crises, premiums on physical gold, like coins and bars, can rise during those periods. On the other hand, periods when gold is less popular often means there’s more inventory, less premiums, and less competition from panic-driven buyers.

Keep Reading: Why Buy Gold? Reasons to Invest in Physical Gold Bullion

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