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What Affects Gold Prices?

Catherine Tramell
Catherine Tramell

Last updated 23. june 2022

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Gold prices go up and down. However, unlike other asset classes, the yellow metal is relatively resilient to externalities. Although the price of gold isn’t necessarily rock-solid, the movements are nowhere as erratic as how stocks move, thanks to the former’s inherent value.

What are those factors that push gold prices lower or increase gold prices? Unsurprisingly, demand and supply play a big part. Besides the regular all-year need, the heightened demand for the metal during specific periods of the year in various parts of the world adds significantly to the metal’s premium charm. Not to mention, gold prices continually move when the U.S. dollar rises or the dollar falls.

what affects gold prices

And then there are quite a few other reasons that push gold prices higher or make them go down. This article will discuss the various factors gold prices increase and decrease. To address the topic from all sides and angles, we shall cover the following:

  • The multiple factors affecting gold prices (inflation, supply and demand, interest rates, etc.)
  • Gold price movements over the years and their reasons
  • Answers to some important questions you may have about gold price movements, and more

If you’re looking to invest in gold but are not sure when is the right time to invest in the metal or are wary of buying overpriced gold, this article is for you. Keep reading.

Why Should You Know What Impacts Gold Prices?

Gold is such a ubiquitous part of most people’s lives that it pays to learn what causes gold prices to move, even if you’re not a potential investor. And if you’re considering investing in gold, then understanding the basics that propel gold price, getting a long-term view on gold price movements, and securing a grip on market psychology become critical.

Read more: Top Gold IRA companies

Factors Affecting Gold Prices

Gold isn’t as fickle or volatile as stocks and most traditional financial investments. There are very few market catalysts that impact gold’s value and market behavior. The following macroeconomic factors drive gold prices in general: 

Inflation

During inflation, the rising price of goods and services reduces a currency’s purchasing power. Rising inflation is bad news for consumers, the economy, and stock investments—particularly growth stocks. In developed markets, higher inflation’s impact on equity valuations is more significant.

A Federal Reserve System branch, the Federal Open Market Committee, is tasked with reviewing financial and economic conditions, ascertaining the right monetary policy stance, and evaluating the risks attached to long-term objectives of sustainable economic growth and price stability. The committee meets several times a year to check issues of monetary supply, currency devaluation, demand for gold, etc., which helps keep inflation under control.

Inflation usually has a positive impact on gold. The precious metal is viewed as a safe haven or a reliable protection measure against consumer price index (CPI) risk, which in turn affect gold prices. In several regions, gold assumes an “alternative currency” position when the official currency loses value, which results in more people holding gold.

Why do gold prices go up during inflation?

Gold is a tangible, real asset with intrinsic value. Fiat money is just a piece of paper if it has no government backing. Most people, therefore, buy a lot more gold and other valuable commodities when the market is headed downward. And that buyer frenzy causes the price of useful items, such as gold, to go up further.

Note: Gold safeguards your wealth during inflation. But because it doesn’t generate returns, it may not be the best anti-inflation investment.

Interest Rates

When interest rates rise, fixed-income investments such as bonds become more attractive. With more money flowing into money market funds and bonds, gold’s performance drops, connotating an inverse relationship between the two. 

However, there have also been instances (several, in fact) during which interest rates and gold prices tend to rise in unison. In the 1970s, for example, when the fed’s interest rates were increasing rapidly, gold prices were also at one of their all-time highs.

In the 1980s, interest rates had quadrupled from during the ‘70s. During that same period, gold prices grew from less than $50 per ounce to close to $850 an ounce. In the mid-1970s, the fed funds rate fell, bringing down the price of gold along with them. By 1978, interest rates started to rise again, and unsurprisingly, gold prices followed suit.

Supply and Demand

Although the above play a role in the price movement of gold, demand and supply are fundamental drivers of physical gold prices, at least in the long term. While supply increases can cause gold rates to plummet, demand plays a more significant or pivotal part. Gold supply changes are slower than the market demand for the precious metal.

All the gold mined, after all, does not add to the supply each year as some may imagine. As of 2016, gold mining production has leveled off. The mining sector has already mined pretty much all readily available gold. Mining firms now must dig further to access more gold reserves, which is not easy. Besides being cost- and effort-intensive, the activity exposes miners to various hazards, and then there’s the environmental impact issue to consider.

Long story short, the costs of gold mining far outweigh the overall value of the gold procured. But mining activities continue in hopes of a treasure trove find.  

Where does the demand for gold arise from? The gold jewelry industry is a significant driver of gold demand. In 2019, jewelry constituted around 50% of the total market for the yellow metal.

Although gold jewelry has more than its fair share of fans in the West, Asia is the biggest consumer of gold ornaments. The precious metal is deeply intertwined with the lives and customs of those regions. In the Indian subcontinent, for instance, there are no wedding events without gold.

Besides being used as jewelry, gold has wide and varied industrial applications. The metal is used in electricity conductors, life-support devices, GPS units, stents, etc. Then there’s also the investment demand for gold.

Investors buy gold in different forms, including physical gold (gold coins, bullion bars, etc.) and paper gold (gold stocks, ETFs, etc.). Not to mention, central banks and government vaults represent a vital demand source for gold.

Central Bank Activities

Central banks usually hoard gold to be prepared for future financial turmoil. But when the going is smooth and there’s nothing untoward to be ready for in the near future, they like to sell a portion of their gold holdings. That’s because, unlike other investments, gold doesn’t generate any income. 

When a central bank has a lot of foreign currency as reserves and there’s a concomitant increase in gold demand, the bank may sell a portion of its gold to benefit from the prevailing high market prices for the holistic benefit of the nation. In specific scenarios, surmounting debts or a battered economy could prompt central banks to initiate such distribution.

As a result, more gold proliferates the market, bringing the prices down. And if there aren’t many people interested or keen on buying gold owing to their low purchasing power, gold prices plummet further. However, the price dip doesn’t stay on for too long as individual buyers view the phase as an excellent opportunity to lap up gold for cheap, causing the price of gold to increase again.

To not disrupt the market and cause major changes in the gold price, central banks could control or cap the amount of gold they can sell during a given year. The Central Bank Gold Agreement, for instance, was made in September 1999 after a phase of growing concerns about uncoordinated gold sales by various central banks and how that destabilized the market. The destabilization caused market fears, which caused further gold price dips.

Not to mention, when the cardinal bank starts to shore up its gold reserves, market sentiments surrounding gold turn favorable, causing the price of gold to go up.

General Economy

Although inflation and central bank policies fall within the economic realm, those aren’t the only drivers of the financial market. Pertinent economic data relating to other aspects such as manufacturing, jobs, GDP, etc., also play a role or affect gold prices.

Strong economic growth implies or is fueled by increased production, low unemployment, lavish consumer spending, etc., causing gold prices to fall. A strong economy implies the Fed or the central bank can initiate monetary policy-tightening action.

If, on the contrary, unemployment is on the rise, manufacturing prospects are weak, etc., the central bank might adopt a bearish approach to monetary policies or money supply. The economic uncertainty coupled with the dovish Fed scenario shall cause the price of gold to go up.

Gold Prices Over the Years

gold prices over the years

Gold has been in use for ages. It was first used as currency around 550 BCE, some 4,000 years ago. However, for the brevity of the piece and to provide a more modern outlook on gold prices, let’s not go too back in time.

In 1257, Britain set the price of gold at £0.89 per ounce. In 1351, the price shot up to £1.34. Gold rates breached the £2 threshold for the first time in 1465, trading at £2.01 an ounce. Fast-forward to 1717; gold was trading at £4.25 for an ounce.

(Note: The prices mentioned above are in pound sterling as the U.S. dollar wasn’t a global currency yet then.)

In 1821, the United Kingdom introduced the gold standard. After a decade, in 1832, America switched to the gold standard de facto from a bimetallic standard and set the gold price at $20.67 an ounce. In 1834, the U.S. raised gold prices to $20.69 an ounce.

After the stock market crashed in 1929, many investors began redeeming paper money for its equivalent gold value, causing gold prices to go up. To curb excessive private ownership of gold, President Roosevelt, in 1933, prohibited the personal possession of gold bullion, coins, certificates, etc. That move to tighten monetary policy resulted in several Americans selling their gold to the central bank, which helped the Fed stabilize gold prices.

In 1934, courtesy of the Gold Reserve Act, Roosevelt raised the gold price to $35 an ounce. In 1971, America was officially off the gold standard, increasing the dollar’s power. Gold, however, was relatively unhinged, rising to more than $120 an ounce in 1976.

By 1980, gold was trading for close to $600 an ounce, thanks to rising inflation. After the price increase trend ended, the gold price dropped significantly and remained near the vicinity of the $410 mark for quite some time. In 1996, a period of steady economic growth, the gold price dropped to less than $300 per ounce.

A few years later in 2001, the Twin Towers were attacked. That spawned a series of stock market shocks and setbacks, resulting in gold prices going up again.

Gold crossed the $1,000 per ounce level for the first time during the sub-prime mortgage crisis. It shot up to $872 an ounce in 2008. In August 2011, gold was trading at $1917. The price, however, subsided, ending the year at $1,574. The following are the prices of gold between 2012 and 2019 at the end of the respective years:

  • 2012: $1,664.40
  • 2013: $1,201.50
  • 2014: $1,199.25
  • 2015: $1,060.20
  • 2016: $1,151.70
  • 2017: $1,296.50
  • 2018: $1,281.65
  • 2019: $1,523.00

(Source: Macrotrends)

At the start of 2020, when WHO declared COVID-19 to be a worldwide pandemic, gold started to rally again. In August 2020, it traded at a never-before price of $2,069.40 an ounce. Since then, the gold price has moved in both directions in correlation to the ebbs and flows of the coronavirus.

As of May 2022, gold costs $1,862.45 an ounce.

Read more: Best gold IRA companies

Conclusion

Gold was, is, and shall be the de facto precious metal for a long time. That, however, doesn’t mean the metal is immune to market movements. As mentioned earlier, its prices go up and down like any other valuable commodity or asset class. And like with all goods and services with a price tag, demand is the major driver of gold prices.

However, the high gold demand hasn’t always completely translated to a growth in the rate of investment in the metal. That’s likely because the metal is usually viewed as an asset to diversify a portfolio more than to accelerate growth. Investors, as a result, do not buy gold in excessive amounts.

Therefore, if you’re looking for investments with growth prospects, steer clear of gold. But if market trends and sentiments such as inflation and deflation or fear and greed impact you, put some money in gold. Even then, hold relatively less gold in your portfolio. 

FAQs

Is gold the only inflation-proof asset?

Though not as effective as gold, other precious metals too can function as inflation hedges. But there are also inflation-linked bonds, such as government bonds or TIPS (treasury inflation-protected securities), that help safeguard wealth against rising prices, besides lending diversity to a portfolio.

Gold ETFs, multiple property investments, REITs (real estate investment trusts), commodities (grains, oil, beef, natural gas, etc.), etc., also protect your wealth when currency value goes down as they appreciate during turbulent economic scenarios. In fact, TIPS and REITs are better or more consistent performers against inflation, offering maximum average returns.

Gold, however, is more glamorous or familiar with the masses than any financial instrument or commodity and is, therefore, more popular as an anti-inflation investment. In other words, you may put money in asset classes other than gold when you sense impending inflation.

Why does demand for gold (a nom-consumable) continues to increase?

Gold is not consumed in the literal sense like oil, coffee, and other commodities. Pretty much all the gold that humankind has mined to date is still around in some form or shape. But even then the demand for gold continues to increase. Why?

Gold is one of those few precious commodities that people cannot get enough of—be it gold bullion or jewelry. And when gold lands in the personal drawers or gold IRA depositories owned by gold-enamored individuals, it’s basically off the open market until the owner sells the metal.

Not to mention, gold investors view gold as a value store and do not actively trade with them, like buying goods using their gold. That further contributes to the lack of gold available in the market.

Should you buy gold when it's trading low?

Although gold is a perceived store of value, and it sounds logical to buy gold when the prices are down, it may not always be the right thing to do. Knowing how much gold you have in your portfolio, how much more you would like to add to your kitty, and your short-term or long-term plans with the investment is vital before making a decision.

If you plan to buy gold and sell it off immediately after the prices go up, go ahead with the purchase. But if you are buying gold for the long haul, do not buy a lot since a substantial chunk of your money will be locked in gold then. We’ve already discussed the particular topic at length before. If you’d like to learn more, here it is: How much gold you should add to your investment portfolio.

Does gold cost more in non-mining countries?

Generally, the price of gold tends to be higher in countries that have a significant gold market but don’t make gold of their own. For instance, India consumes the most amount of gold. Its gold output, however, is paltry. The country mined around 1.6 tonnes of gold in 2020. Gold-mining countries such as China and Australia produced 370 and 321 metric tons of gold in 2021 in comparison.

Since the demand for gold in India is very high, the country imports a lot of gold. The gold that makes it into the country is still not enough to meet the massive demand, which only drives the prices further. Not to mention, the government may levy a bevy of taxes to curtail demand, which in turn affect gold prices further.

What is the gold spot price?

The spot price of gold is the price at which you can buy or trade the precious metal in the open market. The price denotes gold’s current price per ounce or gram.

Spot gold pricing charts help identify gold market trends and ascertain the prices to sell or buy gold at. Long-term investors would study monthly and yearly spot price information. For short-term hedgers, there are spot price charts by the day, hour, and even minutes.

Spot prices of gold are the same everywhere. However, differing currency values and varying dealer premiums could cause the gold price to be lower or higher in some