What Drives the Price of Gold?

Gold is a time-tested, safe-haven asset, the price of which has historically held up well in times of high inflation, market volatility and geopolitical uncertainty.

Because of this, many investors turn to the precious metal in an effort to protect their wealth. And those holding it in their portfolios were rewarded in October 2024 when the price of gold set an all-time high, proving once again how valuable it is as a store of value.

But what drives the price of gold can be confusing and sometimes conflicting. While other commodities are mostly driven by supply and demand, gold is often affected by the psychological effects of economic downturns, monetary policies or currency valuations. Understanding how these, and other factors, contribute to its price is important.

Read on to learn about the factors affecting the value of this precious metal and some considerations to make if you’re thinking about investing in gold.

What affects the price of gold?

Gold prices are affected by numerous economic factors. The following determinants demonstrate the reasons gold could skyrocket given certain economic conditions.

Value of the U.S. dollar

Although gold is a borderless international asset that's recognized and valued globally (beyond national currencies and economic conditions), it's important to note that the precious metal is generally a dollar-denominated asset, meaning the value of gold is priced in U.S. dollars. Dollar-denominated assets typically have an inverse relationship with the value of the U.S. dollar. Therefore, if the value of the dollar decreases, the value of gold will increase and vice versa.

In situations where the value of the dollar decreases, investors are able to buy less gold per dollar due to decreased purchasing power, which intrinsically increases the value of the precious metal. In other words, because the value of the dollar is less, more dollars are needed to buy the same ounce of gold, therefore increasing the value of the precious metal. By extension, during periods of high inflation, gold historically remains stable or increases in price, proving its value as a safe-haven asset.

This was perfectly encapsulated when gold set its all-time high price numerous times in 2024 alongside the diminished purchasing power of the U.S. dollar. Additionally, if the exchange rates of the U.S. dollar decrease relative to other currencies, investors outside the U.S. will be able to buy more gold with their currency, which can also drive up demand and gold prices.

For example, in October 2024, the exchange rate for the euro was equal to $1.08 in U.S. dollars. This coincided with gold setting its all-time high price.

Demand for gold

Gold demand is another factor that can influence prices, and a few industries directly affect interest in buying the precious metal. Gold has a broad base of demand from diverse consumers, investors and institutions.

1. Jewelry-driven demand

Jewelry is one of the most common ways people know how to buy gold. As the demand for jewelry increases, so too can the price of gold. However, jewelry is typically considered one of the weaker drivers of gold prices since many people buy jewelry and keep it for years.

2. Demand from gold exchange-traded funds (ETFs)

If you know how to buy stocks, you're likely familiar with the concept of exchange-traded funds (ETFs). Gold ETFs invest in gold bullion or the companies that mine gold. These ETFs combine some of the benefits of investing, offering both broad industry exposure, convenience and the stability of gold without actual ownership.

Demand driven by gold ETFs has a similar effect on gold prices as other types of demand. The value of the precious metal can increase according to how many people invest in gold ETFs. More demand equates to more buying volume, and the higher buying volume is, the higher shares can go.

3. Central bank buying

We are seeing increasing investments in physical gold led by the world's central banks as opposed to U.S. Treasurys. The reason: Gold is a Tier 1 reserve asset, and central banks are effectively improving the quality of their reserves. The World Gold Council conducted a survey concluding that central banks are placing a greater emphasis on gold’s value in crisis response, diversification attributes and store-of-value credentials.

When the U.S. sanctioned and froze Russian assets, other countries and central banks realized the importance of being in control and eliminating counterparty risk, hence gold began seeing massive inflows in the wake of Russia's invasion of Ukraine. Those inflows into gold — as opposed to conventional and conservative U.S. Treasurys. Central banks in the various BRICS+ nations, including China, Russia and India, are buying more gold at a faster pace.

In essence, central bank gold buying is showing a migration of the asset from West to East, with the aim of those central banks being to create a network of countries that have confidence to trade outside of the U.S. dollar.

4. Demand for industrial applications

Gold is used for numerous industrial and production applications, including electronics, healthcare, semiconductors and space exploration. If demand increases in the industries that use significant amounts of gold, the value of the precious metal can increase alongside that demand as more is needed to produce goods and complete services that rely on the precious metal.

Gold production

Gold is a finite resource. Therefore, prospecting and mining physical gold is increasingly more difficult and more expensive. As demand outpaces supply, its price increases.

Whether or not peak gold has been reached is a point of contention. However, production has plateaued over the past decade, and some experts estimate that by 2050, mining gold could be an unsustainable endeavor.

While the precious metal can be melted and repurposed numerous times, much of the world’s gold takes the form of jewelry that remains out of circulation for lengthy periods. As gold gets harder to source, its price will increase.

Interest rates

The relationship between interest rates and gold prices is a bit complicated. In general, they historically have an inverse relationship. Therefore, gold prices rise as interest rates fall, and gold prices fall as interest rates rise.

However, as recent history has proven, it’s not a direct correlation. In its attempt to quell runaway inflation, the Federal Reserve raised interest rates at 10 consecutive meetings beginning in March 2022. In fact, the price of gold hit its then-all-time high in December 2023 amid the highest interest rates since 2007.

Typically, though, when interest rates rise, it signals that the economy is strong. Under these circumstances, sentiment can prove bullish and investors may feel confident purchasing higher risk assets like stocks. If demand for other assets increases, gold and precious metal demand decreases and prices will subsequently fall.

On the other hand, other economic factors — like poor consumer confidence or weak job reports — could signal investors to stay away from higher risk assets even in a high-interest-rate environment, meaning you wouldn’t see the expected effect on gold prices.

Overall, interest rates can have an inverse effect on gold prices, but only when paired with certain economic factors. A good example of that is when the Fed began cutting interest rates in October 2024, which coincided with gold hitting yet another all-time high.

Geopolitical factors

Geopolitical factors may have a positive effect on gold pricing, which means that the value of gold will move in the same direction as geopolitical tension. Since gold is seen as a safe-haven asset, investors may turn to it during worrisome times in an attempt to protect their money from the fallout of conflict. Therefore, when geopolitical tensions flare, gold values may increase.

That’s precisely what happened in the first quarter of 2022 when the Russia-Ukraine conflict helped gold gain 6%. This was also evidenced when the current conflict between Hamas and Israel erupted in the third quarter of 2023. The day before the Hamas attack, the price of gold was $1,834.60/troy ounce. By Oct. 27, 2023, 20 days after the attack, the price of the precious metal had increased 8.78% to $1,995.80/troy ounce.

However, geopolitical factors may not be as influential of a factor on gold prices as many assume they are. Gold is typically associated with the U.S. economy, so overseas tensions and other events may not affect gold values as strongly as internal conflict or domestic monetary policy.

When it comes to gold and geopolitical tensions, the old adage, “buy the rumor, sell the news,” can apply. Investors tend to buy gold before a crisis occurs and then sell it to take profits once the situation unfolds.

Lastly, some geopolitical situations are seen as having positive effects on global order, like military action that protects the U.S. economy. In these situations, investors may not see opportunity in gold, so they will stick with higher-risk investments like stocks.

One historical example of this is when the Banana Wars began in 1898 and the Dow Jones Industrial Average gained 22.49% while the price of gold remained fixed at $20.67/troy ounce and remained unchanged until 1933.

Who determines the price of gold?

Numerous factors influence gold pricing, so no one person or organization is fully responsible for setting prices. However, the London Bullion Market Association (LBMA) publishes gold prices twice a day via the ICE Benchmark Administration (IBA). The IBA consists of multiple banks, an oversight committee and a panel of internal and external chair members. The IBA sets gold spot prices and gold fixed prices based on supply and demand as well as the gold futures derivative markets.

The major derivative markets include the Commodity Exchange (COMEX) in the U.S. and the LBMA in the U.K. The COMEX and LBMA make futures contracts with buyers that agree to pay a certain price for gold that they will receive at a specific time in the future. Combined with supply and demand information, the IBA can determine the spot price, which is the market price of unrefined gold. The IBA then sets a gold price to publish as the LBMA Gold Price, or the London Gold Fix.

In recent years, China has gained more control over the price of gold from the West due to its significant gold purchases by both the People's Bank of China (PBoC) and the private sector. In 2023, the PBoC bought a record 735 tons of gold — much of it covertly — while private sector imports totaled 1,411 tons. China’s aspiration to lead a global gold market coupled with this massive buying spree has been allowing the country to have a lot more influence on the gold market and prices in general.

How volatile is gold?

The gold market is typically seen as a safe haven with little volatility, which is why buying gold to balance your portfolio is one of the most common tips for investors looking to diversify their holdings.

In general, you’ll find that gold is less volatile in the long term, which is why it could make a good investment to protect long-term funds — for example, in gold individual retirement accounts. However, it can be volatile in the short term. Other asset classes, like stocks and bonds, tend to have more volatility during unpredictable economic and market conditions. But gold has a relatively indirect relationship between price and volatility because investors typically use it as a safe haven during economic turmoil.

There are many factors that play into the ability to make money from investing in gold. Remember that — aside from a handful of ETFs and gold miner stocks — when you invest in the precious metal, there are no dividends or interest earned on gold investments. So outside of those few ETFs, the only way to make money from gold is to sell it when the price rises.

As part of a diversified portfolio, it can serve as a hedge during economic downturns or periods of elevated inflation and market volatility. So investors shouldn't be too concerned if there is a temporary drop in gold prices. Historically, they tend to rise again after a relatively short period, which can continue to increase your long-term returns.

Reasons why gold is often referred to as a safe-haven investment

A safe-haven investment is an investment that has no correlation or a negative correlation with other markets. For example, gold is often seen as a safe haven because it tends to move in opposition to stocks and bonds, thereby serving as a hedge against losses in those asset classes. So is gold a good investment? Here are some reasons why the precious metal is considered a relatively safe investment.

Gold diversifies your investment portfolio

A diversified portfolio should include investments that have no correlation or negative correlations to each other, like the relationship between gold and stocks. If you have a well-diversified portfolio, you lower the risk of experiencing big losses all at once.

For example, a major economic event may cause you to lose money in stocks. However, your gold values may increase, counterbalancing your losses. Even if gold values don’t go up, they’re less likely to lose value at the same time as stocks, so you’re unlikely to experience big losses across both asset classes.

Gold is a hedge against inflation

Inflation is one of the most common reasons for an increase in gold prices. Therefore, gold has historically been a good investment option during times when the prices of goods and services are rising. As the U.S. dollar loses value, investors often turn to gold, which subsequently increases the precious metal’s demand and value. Investors may also view gold as a good way to store funds for the future when they need extra money and the cost of living has increased.

Gold is a highly liquid asset

If you find yourself short on cash after investing in gold, you should have no problem selling your gold investment, which is why the precious metal is considered a highly liquid asset. Buying and selling gold online, like with gold ETFs or through platforms offering gold bars and coins, also sees high volume.

Regardless of the type of gold investment you hold, there’s no shortage of opportunities to find buyers. While physical gold may be slightly more challenging to sell because of logistics like transportation and storage, it still tends to be highly liquid.

Key takeaways

A number of factors are responsible for driving price of gold, including:

• The value of the U.S. dollar
• Demand for gold, including jewelry, gold ETFs and industrial needs
• Gold production and supply
• Interest rates and other economic factors
• Geopolitical factors and their impact on the U.S. economy

The relationship between these economic factors and gold’s value can be ambiguous since there are no set rules determining how gold prices rise or fall.

Investing can be subject to emotions, so the psychological effects of economic uncertainty often play a role in people turning to safe-haven investments like gold. Therefore, it’s difficult to predict how investors will react to certain economic factors, or how those reactions will impact gold prices

Spot prices for gold are set by the IBA based on supply and demand, economic factors and futures contracts. While gold is typically seen as a stable asset, it can experience some volatility in certain short-term situations.

However, in the long term, gold can be considered a safe investment. You may want to consider buying gold to diversify your portfolio, hedge against inflation and to own highly liquid assets during times of need.