What affects gold prices?

Interest rates, demand and geopolitics can all impact gold prices

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Gold has been an investment and currency for thousands of years and has represented wealth in many cultures around the world. As such, gold continues to be a favorite investment for many, but it’s important to understand how gold prices are set before choosing to invest.

Gold prices are affected by many factors, including supply and demand, economic news and geopolitical events. Gold prices are updated in real time through most major online brokers, but the price you pay for physical gold may vary from buying, say, a gold exchange-traded fund (ETF).


Key insights

  • Gold prices are affected by market conditions such as interest rates and inflation.
  • Gold prices rise during geopolitical uncertainty.
  • When the economy is strong, gold prices may fall.
  • Gold is seen as a safe haven investment, but it still carries a real risk of loss for investors.

Inflation

When prices rise rapidly, this is known as being in an inflationary environment. Gold is one of the assets that tend to do very well in inflationary environments. Because of this, many investors view gold as one of the best hedges against inflation — as prices rise, gold prices tend to increase as well, preserving your purchasing power.

Gold is also a physical asset that can’t just be duplicated. So, while central banks can simply print more currency, gold must be mined and processed to become accessible. This gives gold even more value when inflation hits a country.

“Determining whether gold is a wise investment depends on how you define a robust investment strategy,” said Arielle Tucker, a certified financial planner at Connected Financial Planning.

“Over the past century, the S&P 500 has generally outperformed gold. However, it's crucial to acknowledge intermittent periods where gold has outpaced the S&P 500. Notably, during times of market crisis when equities have underperformed, gold has often served as a reliable hedge against inflation.”

Strength of the U.S. dollar

Gold is typically denominated in U.S. dollars when its price is evaluated. Gold has an inverse price relationship with U.S. dollars, so when the dollar weakens (goes down in value), gold goes up in price. Conversely, when the U.S. dollar is strong, you can buy more gold with each dollar, and the price of gold is pushed down.

In addition, the U.S. dollar is often compared to other national currencies. If the value of the U.S. dollar goes down relative to another currency, this means other countries can buy more gold in their national currency. This also increases demand for gold — and increases the price as well.

» MORE: How to buy gold

Economic uncertainty

Gold has been around for thousands of years and tends to hold its value and purchasing power over a long period of time. This gives gold a reputation for being a stable asset in times of economic uncertainty. Investors flee to gold when it looks like traditional assets will underperform.

For example, as the threat of inflation and rising interest rates arose at the beginning of 2022, the stock market faltered, but gold rose in price by over 10%.

But the inverse is true, and as an economy strengthens, gold prices may go flat or even decline. With low interest rates and a strengthening economy coming out of the Great Financial Crisis, gold prices were mostly flat from 2013 to 2019.

Political turmoil

When there is political turmoil and uncertainty around the globe, investors may choose gold to ride out the storm. This is because geopolitical events can impact the stock market and investors may see gold as a more stable place to park their investment funds until things calm down. This can increase gold prices in the short term when there is a war or upheaval in a developed country.

For example, during the Russia-Ukraine conflict in 2022, gold prices increased rapidly in the months after the start of the war.

Production and demand

In the past, buying and selling gold required physically purchasing it, storing it and then selling it at some point. Today, you can place online orders in just a few minutes or simply invest in a gold ETF. This makes it easy to buy and sell gold, and demand can increase quickly as investors react to market conditions.

When there is more demand for gold ETFs or physical gold, the price will increase. Inversely, lower demand will lower the price of gold.

Gold production itself will also impact prices. When production slows and can’t keep up with demand, the price will rise as the gold supply is lower than demand requires. This causes investors to pay more for an ounce of gold or for a gold ETF.

» MORE: Physical gold vs. ETFs

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    FAQ

    Who sets the price of gold?

    Gold spot prices are set by averaging the price of futures contracts from two major derivatives market operators. The COMEX (CME) and London Bullion Market Association (LBMA) operate the largest derivatives markets, and spot prices are based on futures contracts held within these markets. An oversight committee, several banks and a panel of chair members set the spot price twice a day, known as the LBMA Fix.

    How safe is it to invest in gold?

    Gold is seen as a safe haven investment, especially during times of economic or political turmoil. And many investors choose gold due to its history and long-term returns that outpace inflation. But gold prices can fluctuate a lot and drop in value, so there is a risk of loss associated with investing in gold.

    Is gold a good hedge against inflation?

    While gold has historically been seen as a good hedge against inflation, there is not always a direct correlation. For example, in 2022, inflation soared, but gold prices dropped for most of the year. They only began increasing toward the end of the year and beginning of 2023. So, while gold can be an inflation hedge, it doesn’t always work that way.

    Bottom line

    Like most assets, gold prices are affected by supply and demand. But there are many other factors at play for gold prices, including inflation, economic sentiment and geopolitical events. While spot gold prices are officially set by committee and gold futures prices, ultimately, gold’s price is informed by many external factors.

    Investing in gold can be a good idea for some investors, but it’s important to understand your risk tolerance, investment goals and time horizon before choosing to buy gold.


    Article sources

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

    1. GoldPrice.Org, "Gold Price History." Accessed Dec. 7, 2023.
    2. Bloomberg, "Gold Price Rises Above $2,000 as War in Ukraine Boosts Haven Demand." Accessed Dec. 7, 2023.
    3. World Gold Council, "Historical demand and supply." Accessed Dec. 7, 2023.
    4. BullionByPost, "Who sets the price of gold?" Accessed Dec. 7, 2023.
    5. LBMA, "LBMA Precious Metal Prices." Accessed Dec. 7, 2023.
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