Introduction
Like any good or service, the price of Gold is determined by changes in supply and demand. But gold has unique characteristics : it is simultaneously a commodity, an investment asset, and a reserve asset for central banks.
It should be noted that the law of supply and demand is the determining factor for the price of gold. However, market equilibrium depends on many other factors such as the level of inflation, changes in interest rates, and also the geopolitical situation.
Thus, the factors influencing the price of gold are numerous. In this article, we will break down each of these elements together to give you a clear and complete overview on this subject.
I- Economic factors influencing gold prices
1- Inflation and its impact on gold prices
Gold is a metal with intrinsic value that allows it to be considered a store of value, it is often regarded by analysts as a good hedge against inflation. This advantage earns it particular attention from investors for its protective role in terms of purchasing power.
Indeed, gold continues to attract investors who use it as a store of value. The metal is traditionally used as a hedge against inflation because it tends to maintain its value during periods of rising prices.
Besides, in order to consider an asset as a store of value, it must maintain its exchange rate parity with goods and services over time.
Thus, during a growth in the long-term inflation rate, a premium is included in nominal interest rates, which results in the adoption of a gold growth rate equivalent to the new inflation rate, and as a capital gain is anticipated on gold whose return is higher than money, there follows an increase in the demand for gold.
This relative rate of return effect is responsible for the sensitivity of the gold spot price to changes in inflation expectations.
2- The influence of interest rates on the price of gold
In principle, the correlation between gold and interest rates is inverse. Rising interest rates make assets more attractive, as the potential gain increases.
Besides, the most important interest rate is that set by the Federal Reserve, the American Central Bank, which is the key arbiter of global markets.
Thus, when interest rates rise, gold tends to fall as investors turn to government bonds and other asset classes whose returns remain linked to interest rates, to enjoyd therefore higher earnings.
It should be noted that the surge in demand for bonds is primarily focused on 10-year U.S. Treasury bonds, considered the ultimate benchmark for yields.
On the other hand, when interest rates fall, the opposite happens. Gold then becomes a safe haven asset again, demand increases, the metal becomes scarcer and its price rises.
It should be noted that gold, like most commodities, does not distribute dividends or interest, so holding gold involves an opportunity cost that rises when returns on fixed-income assets increase.
These interest rate movements generally prompt speculators to review their gold allocation, so that in the event of rising US interest rates, investors will turn to the dollar and more profitable fixed-rate products.
3- The role of global currencies in gold price fluctuations
In principle, the origin of the influence of exchange rates on gold stems from the fact that gold is a “countryless” asset.
Thus, changes in investment preferences between countries are systematically reflected in the price of gold. Elucidate this idea using the following example: investors in a country “X” with poor economic forecasts may turn to gold and assets from other countries.
In this case, the currency of country “X” would depreciate as a result of capital flight, and since there is a negative correlation between gold prices and exchange rates, this depreciation of the currency would automatically lead to a rise in the price of gold.
Generally, the standard method for evaluating gold is to measure its price. This involves calculating the number of dollars that would need to be exchanged to own one ounce of gold.
So, the gold price today represented by the gold price per ounce is 5,022.84 dollars.
It should be noted that the price of gold is generally quoted in U.S. dollars; therefore, any fluctuation in the value of the dollar automatically affects the value of the precious metal.
So, two scenarios are possible:
A- Strong dollar
When the dollar strengthens against other currencies, it becomes more expensive for holders of other currencies to buy gold. This tends to reduce demand and, consequently, the price;
B- Weak dollar
If the dollar weakens, buying gold becomes cheaper for foreign investors, which boosts demand and drives up prices.
II- Factors related to the supply and demand of gold
There are several sources of demand for gold, which influence its price to varying degrees.
On the other hand, the supply of gold is limited and inflexible, as it is only available on earth in small quantities, in addition producers cannot quickly adjust their production level, it is for these reasons that the influence of supply on the price of gold is limited at least in the short term.
Therefore, the determinants of gold price are more likely to be found on the demand side : coming from the jewelry industry, investors, or central banks.
1- Mining production and its effect on gold prices
The gold price is volatile, in particular because many factors come into play in determining its price.
The gold supply is divided into two distinct parts: gold extracted from mining reserves and recycled gold.
Manufacturers have little control over recycling rates – and therefore over the price of gold – since it depends on the amount of gold sold back by consumers.(90% of recycled gold comes from the jewelry industry).
On the contrary, it is prices that impact the amount of gold available for recycling: the resale of gold increases when prices are higher, and vice versa.
On the mining production side, the impact of the production level on the price is reflected in the fact that if gold production decreases sharply, this generates upward pressure on prices.
The impact of mining production on prices can only be marginal, partly because natural gold reserves are limited, and partly because of the length and complexity of the gold production cycle.
Production cannot therefore adapt quickly to frequent fluctuations in demand, especially since the period between the start of the exploration phase of a deposit and the actual extraction of gold is 10 to 20 years. This is how the excess demand is met through recycling.
Moreover, since gold does not deteriorate, all the gold extracted since its discovery must exist somewhere.
And it is therefore rather in this direction that we must look for the main factors influencing gold prices, with investment demand being the primary factor.
2- Industrial and jewelry demand and its impact on gold prices
The use of gold as a raw material concerns several sectors, either in jewelry, or for the manufacture of electronic components in industry, including: communications, information technology, the space industry and fuel cells.
Moreover, gold is valued in the industrial sector compared to other metals for several reasons:
- Good electrical conductivity;
- Good thermal conductivity;
- Good corrosion resistance;
- Catalytic properties;
- Excellent biocompatibility.
The gold price should therefore logically be influenced by global growth (particularly consumption and industrial production): when economic growth is strong, the increase in demand should translate into upward pressure on prices and vice versa.
Furthermore, jewelry has always been a dominant element in the demand for gold. Prized both for their value and their beauty, gold jewelry enjoys a consistently universal status.
In this context, the demand for gold from the jewelry industry increases sharply during certain commercial, cultural or religious holidays, particularly in China and India, the two main consumers worldwide.
Thus, the market’s appetite for jewelry is due to the social role played by gold, the demand for which surges during cultural events, for example during the wedding season in India.
Furthermore, gold jewelry is considered by some societies as a means of transmitting wealth between generations.
It should be noted that, while gold is a raw material, it is also an investment asset, and the scale of the volumes traded on the stock markets implies a much greater influence on the price of gold than the jewelry business.
3- Central bank reserves and their influence on gold prices
National central banks hold large gold reserves, as the yellow metal was particularly popular for its quality as a store of value and allowed central banks to strengthen confidence in their currency.
It therefore constitutes a significant part of central banks’ foreign exchange reserves.
Indeed, central bank demand has a significant impact on the price of gold, as markets anticipate that this trend is sustainable.
Thus, unlike a consumer or an investor, central banks conduct long-term operations and their demand could therefore remain strong for several years.
However, it must be borne in mind that the particularity of gold, unlike other raw materials, is that it is not very sensitive to variations in consumption and production flows on the market because these flows are relatively small compared to the large quantities of gold held in central banks and in savings.
III- Geopolitical factors and their influence on gold prices
1- International conflicts and their effect on gold prices
In general, wars slow down investment and business development, the economy can slow down and investors then tend to turn to safer savings products, such as precious metals.
Moreover, gold is the ultimate safe-haven asset and its price is influenced by the economic situation, the level of financial instability, and geopolitical tensions.
This is how the rise in geopolitical tensions is prompting central banks to want to reduce their dependence on the dollar and to favour gold.
A stable and favorable economic and financial environment will tend to penalize gold price, whereas an increase in economic, financial or geopolitical tensions will lead to an increase in the price of gold.
Gold’s safe-haven status explains a large part of the sharp rises in the price of gold: the multiplication of economic, financial, political or even health crises has been an important factor in supporting the price of the yellow metal.
2- Investor policies and their impact on the gold market
The demand for gold as an investment asset is primarily driven by its safe-haven status. Gold is a tangible asset with intrinsic value and therefore carries no risk of bankruptcy.
It is a tool for diversification and capital preservation. Therefore, the demand for gold as an investment is declining due to its attractiveness to institutional and private investors worldwide.
Actually, buy gold or global demand for gold consists of direct acquisition of coins and bars, but also indirect ownership through Exchange Traded Funds and derivative products such as gold futures.
It should be noted that futures are standardized forward transactions, in which the date, price, delivery date, and the quantity and quality of gold are specified.
In principle, gold is a financial asset sought after by investors during times of crisis or uncertainty, but its demand is also determined by arbitrage opportunities with other assets, particularly government bonds, which are also considered low-risk investments.
Furthermore, since gold does not generate returns, there is an opportunity cost to holding gold compared to bond products when interest rates are high
It should be noted that gold’s performance is often correlated with real interest rates, that is, interest rates adjusted for inflation. When interest rates are high, bonds become more attractive, negatively impacting the price of gold.
Conversely, when interest rates are low, investors turn to assets offering higher returns. When interest rates fall below inflation, meaning when real interest rates become negative, gold becomes a more attractive investment than bonds.
Moreover, from an investor’s point of view, gold is a complementary investment asset compared to stocks.
Thus, investors make portfolio adjustments so that when the stock market is bullish, they tend to move towards the stock market and to sell gold to adjust the portfolio in response to the anticipation of a capital gain.
3- Economic crises and their influence on gold prices
Gold has been a safe-haven asset for thousands of years because it tends to hold its value during times of turmoil.
This is why, in times of crisis, it appears as the last reliable investment.
It is worth noting that gold throughout its history has always been considered a unique raw material for its property of preserving value, particularly in times of unrest.
Indeed, gold, as a safe-haven asset, tends to rise in the event of an economic or financial shock.
In any case, the main phases during which the price of gold soared can be described as follows:
- During the oil crisis of the 1970s;
- During the subprime mortgage crisis in 2008;
- During the Covid pandemic;
- The beginning of the war in Ukraine;
- The outbreak of war with Iran in 2026.
Conclusion
Gold, unlike other assets, has the particularity of being very liquid; its divisibility, acceptability, homogeneity, transportability and solidity make it easier to trade.
It is a tangible, physical asset listed on stock exchanges worldwide by a private entity: the LBMA (London Bullion Market Association). This is the world’s largest gold trading market, generating over 75% of over-the-counter transactions on its own.
The LBMA includes many members including major international banks, but also mining companies, gold coin dealers, jewelry manufacturers and refiners.