What factors influence the price of gold?
price of gold
Gold is a precious metal that has been used as a store of value for thousands of years. Today, it is a key component in many investment portfolios, serving as a hedge against volatile stock markets and interest rates. As such, it should come as no surprise that the price of gold is affected by a variety of factors. These include supply and demand, inflation, interest rates (and interest rate expectations), investor behavior vis-a-vis risk, and geopolitical events.
Gold prices are primarily determined by investment demand. When investors seek safe haven assets during times of uncertainty, demand for Gold rises and prices increase accordingly. A number of macroeconomic and market conditions can stoke investors’ desire for safety, such as recessions, periods of high inflation, financial crises, and stock market volatility.
Historically, gold has been a good hedge against inflation. As the purchasing power of paper money erodes, gold’s relative stability typically holds its value and increases demand. Rising inflation also tends to drive up gold’s price, as investors look for ways to preserve their wealth.
What factors influence the price of gold?
In addition to inflation, the price of gold is influenced by global interest rates and central bank policy. Gold and interest rates are inversely correlated, meaning that when interest rates are low, demand for gold is high. Conversely, as interest rates rise, the opportunity cost of holding gold (since it offers no yield) increases, which can lower demand and reduce prices.
The actions of ETFs (electronic traded funds) and other financial institutions also have a minor influence on gold prices. When the value of the dollar falls, gold prices tend to increase since foreign investors can buy more of the precious metal with their domestic currencies. Conversely, when the value of the dollar rises, foreign investors are able to purchase less gold with their U.S. dollars.
Political instability and uncertainty have a significant effect on gold prices as well. War, trade conflicts, currency crises, natural disasters, and other events that shake the foundations of the social or financial order can push investors toward gold as a safe haven asset. The COVID-19 pandemic, the escalation of US-China trade tensions, and Russia’s invasion of Ukraine are just a few examples of geopolitical events that have sent gold prices soaring in recent years. The fact that gold is a global asset means that any major political upheaval has the potential to impact prices around the world.