What Affects the Price of Gold?

Gold is influenced by a complex interplay of factors—some obvious, some surprising. Understanding these drivers helps you make better decisions about when to buy, sell, or hold. Here are the 10 most important factors that move gold prices.

1. US Dollar Strength

Gold and the US dollar have a strong inverse relationship. When the dollar strengthens, gold typically falls. When the dollar weakens, gold typically rises.

Why? Gold is priced in dollars globally. When the dollar strengthens, gold becomes more expensive for foreign buyers, reducing demand. The DXY (Dollar Index) is the key metric to watch.

2. Interest Rates

Gold pays no interest or dividends. When interest rates rise, bonds and savings accounts become more attractive, pulling money away from gold. When rates fall, gold becomes relatively more attractive.

The key metric is real interest rates (nominal rates minus inflation). Negative real rates are extremely bullish for gold because savers lose purchasing power by holding cash.

3. Inflation and Inflation Expectations

Gold is traditionally seen as an inflation hedge. When inflation rises (or is expected to rise), investors buy gold to protect purchasing power.

The 2020-2024 gold bull market was largely driven by inflation concerns as central banks printed unprecedented amounts of money in response to COVID-19.

4. Central Bank Buying

Central banks are major gold buyers. Since 2010, central banks have been net buyers, with demand accelerating dramatically since 2022.

Central bank buying creates sustained demand independent of retail investors. Many analysts believe this structural shift is a major factor in gold's recent strength.

5. Geopolitical Risk

Gold is a "crisis hedge." Wars, political instability, and international tensions drive investors to gold as a safe haven. Notable examples:

• Russia-Ukraine conflict (2022): Gold spiked to $2,050
• Middle East tensions: Periodic spikes on escalation fears
• US-China tensions: Ongoing uncertainty supporting gold
• De-dollarization: Countries reducing dollar dependence

6. Stock Market Performance

Gold often moves opposite to stocks, though the relationship isn't always consistent. During stock market crashes, gold typically rises as investors seek safety. During strong bull markets, gold may underperform as investors chase higher returns in equities.

The Dow-Gold ratio and Gold-S&P ratio help track this relationship over time.

7. Mining Supply

Global gold mining produces about 3,000-3,500 tonnes per year. This supply is relatively stable and inelastic—you can't quickly ramp up gold production when prices rise because new mines take 10+ years to develop.

Mining costs (the "all-in sustaining cost" or AISC) provide a floor for gold prices. When prices fall below mining costs (~$1,200-1,400/oz for many miners), production eventually decreases.

8. Jewelry and Industrial Demand

Jewelry accounts for about 50% of gold demand, with India and China being the largest markets. Strong economic growth in these countries typically increases gold demand. Conversely, recessions reduce jewelry purchases.

Industrial uses (electronics, medical, aerospace) account for about 10% of demand but are growing as gold's unique properties make it essential in advanced technologies.

9. ETF and Investment Flows

Gold ETFs (like GLD and IAU) hold thousands of tonnes of physical gold. Large inflows or outflows from these funds can move prices. When investors buy ETF shares, the fund must buy physical gold. When they sell, gold is liquidated.

ETF holdings can be a useful sentiment indicator—rising holdings suggest increasing investment demand.

10. Currency Crises and Monetary Policy

Local currency crises drive gold demand in affected countries. When a currency collapses (like the Turkish lira or Argentine peso), citizens rush to gold as a store of value.

Broader monetary policy concerns—fears of currency debasement, MMT (Modern Monetary Theory), or unsustainable debt levels—also support long-term gold demand.

Summary: Bullish vs Bearish Factors