What Drives the Price of Gold?
Gold is highly sought after, not just for investment purposes and to make jewelry but also for use in the manufacturing of certain electronic and medical devices. In addition, there are external factors like market conditions and gold supply that impact the precious metal’s price. Let’s look more specifically at what drives the price of gold.
Key Takeaways
Investors have long been enamored by gold, and the price of the metal has increased substantially over the past 50 years.
Not only does gold retain additional value, but supply and demand have a huge impact on the price of gold—especially demand from large ETFs.
Government vaults and central banks comprise one important source of demand for gold.
Gold sometimes moves opposite to the U.S. dollar because the metal is dollar-denominated, making it a hedge against inflation.
Supplies of gold are primarily driven by mining production.
Understanding Investing in Gold
Before we touch on what drives the price of gold, let’s get to know the asset a little bit more first. Gold has long been considered a robust and reliable investment, often seen as a haven during times of economic uncertainty. Unlike stocks and bonds, gold is a tangible asset that people can feel, touch, and actually use.
One of the key advantages of investing in gold is its liquidity. Gold is universally recognized and can be easily bought or sold in various forms such as coins, bars, and jewelry. There are also many such as the SPDR Gold Shares (GLD) that let investors buy and sell gold without ever having to physically own the actual precious metal.
Moreover, gold can serve as a strategic asset in an investment portfolio due to its low correlation with other asset classes like stocks and bonds. According to the World Gold Council, gold’s movement is often correlated with the stock market during “risk-on” periods and not correlated to periods of market stress. Note that the correlation between two assets can change over time, and the World Gold Council’s claim is as of September 2024.1
History of the Price of Gold
Over the past decade, gold’s price has experienced significant fluctuations. In the early 2010s, gold prices were relatively high, reaching an all-time peak of approximately $1,900 per ounce in September 2011. This surge was driven by the aftermath of the global financial crisis which led investors to seek the security of gold amidst economic uncertainty and fears of inflation.2
Following this peak, gold prices entered a prolonged period of decline and stabilization. From 2013 to 2015, prices generally trended downward, bottoming out at around $1,050 per ounce in December 2015. This decline was influenced by a recovering global economy, rising interest rates, and a stronger U.S. dollar which reduced the appeal of gold as an investment.2
From 2016 onwards, gold prices began to recover. By 2019, gold had regained much of its lost value, averaging around $1,300 to $1,500 per ounce. The onset of the COVID-19 pandemic in early 2020 further boosted gold prices as investors flocked to safe-haven assets amidst global market turmoil and unprecedented economic disruptions.2
In August 2020, gold reached a new all-time high of over $2,070 per ounce, fueled by the economic impact of the pandemic, stimulus measures, and low interest rates worldwide. Although prices slightly retreated after this peak, they remained elevated throughout 2021 and 2022, typically fluctuating between $1,700 and $1,900 per ounce.2
In late 2023, gold began a strong push that continued into 2024, reaching all-time highs in Sept. 2024 of just over $2,500.3
With the price of gold now in context, let’s take a look at the five biggest factors that drive the price of gold. Note that these are in no particular order, and the order they are listed is not necessarily indicative of their importance or weight.
Central Bank Reserves
Central banks hold paper currencies and gold in reserve. As central banks diversify their monetary reserves (away from the paper currencies they accumulate and into gold) the price of gold typically rises. Many of the world’s nations have reserves that are composed primarily of gold.
Bloomberg reported that global central banks have been buying the most gold since the United States abandoned the gold standard in 1971, with 2019 figures dipping just modestly from 2018’s 50-year record.4
After a downtick in central bank gold purchases in 2020, the pace picked up again in 2021 and surpassed the 50-year record again in 2022. 2023 also saw a significant growth in central bank gold reserves.567
The top gold buyer in 2022 was the central bank of Türkiye, followed by Uzbekistan, India, and Qatar. The top gold buyers in 2023 were China, Singapore, and the Czech Republic.789
Value of the U.S. Dollar
The price of gold is generally inversely related to the value of the U.S. dollar because the metal is dollar-denominated. All else being equal, a stronger U.S. dollar tends to keep the price of gold lower and more controlled, while a weaker U.S. dollar is likely to drive the price of gold higher through increasing demand (because more gold can be purchased when the dollar is weaker).
