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.
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.
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.
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.
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.
In late 2023, gold began a strong push that continued into 2024, reaching all-time highs in Sept. 2024 of just over $2,500.
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.
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.
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.
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).
As a result, gold is often seen as a hedge against inflation. Inflation is when prices rise, and by the same token, prices rise as the value of the dollar falls. As inflation ratchets up, so does the price of gold.
The impact of inflation and the value of the dollar can be seen in the price action of gold after the COVID-19 pandemic. As inflation soared in 2022, the price of gold actually declined throughout much of the year, partly owing to the strength of the dollar against other world currencies. However, after hitting a low of less than $1,630 per ounce in September and October 2022, the price of gold began to recover, hitting new all-time highs and continuing to rise into 2024.
Demand
Worldwide Jewelry and Industrial Demand
Jewelry remains one of the main uses of gold. Jewelry accounted for approximately 88% of gold demand in Q2 2024, excluding OTC demand, according to the World Gold Council. Jewelry has consistently remained the highest source of demand for gold.
In addition, with the boom in artificial intelligence, year-over-year demand for gold to be used in technology grew 11% in the second quarter of 2024. This means that as demand for consumer goods (like jewelry and electronics increases), the cost of gold can rise.
Investment Demand
Gold also sees demand from exchange-traded funds (ETFs). These are securities that hold the metal and issue shares that investors can buy and sell just like stocks. The SPDR Gold Trust ETF mentioned earlier is the largest and held roughly 863 tons of gold in September 2024.
During times of economic uncertainty, as seen during times of economic recession, more people begin investing in gold because of its enduring value. Gold is often considered a safe haven for investors during turbulent times.
When expected or actual returns on bonds, equities, and real estate fall, the interest in gold investing can increase, driving up its price. Gold can be used as a hedge to protect against economic events like currency devaluation or inflation. In addition, gold is viewed as protection during periods of political instability.
While some ETFs represent ownership in the actual metal, others hold shares of mining companies rather than actual gold.
Gold Production
Major players in worldwide gold mining include China, South Africa, the United States, Australia, Russia, and Peru. The world’s gold production affects the price of gold, another example of supply meeting demand.
Gold mine production was roughly 3,000 metric tons per year in 2020 and 2021, down from a peak of around 3,300 metric tons per year in 2018 and 2019. However, gold production was up in 2022 and 2023.
One thing to keep in mind is how it relatively becomes harder and harder to mind gold. One reason is that the easy gold has already been mined. Miners now have to dig deeper to access quality gold reserves.
The fact that gold is more challenging to access raises additional problems: Miners are exposed to additional hazards, and the environmental impact is heightened. In short, it costs more to get less gold. These add to the costs of gold mine production, sometimes resulting in higher gold prices.
What Makes Gold So Valuable?
The value of gold is rooted in the history of human civilization, as the metal has remained a symbol of wealth for thousands of years. The value of gold ultimately stems from a social construction, based on the agreement that gold has been valuable in the past and will remain valuable in the future. In addition, gold’s attractiveness revolves around its capacity to maintain its value over time and its uses in jewelry and technological products.
What Drives Fluctuations in Gold Prices?
Although the metal has proven its capacity to maintain its value over time, the price of gold is often volatile over the short term. There are many factors that influence the price of the metal. Because gold is generally dollar-denominated, a stronger U.S. dollar tends to drive gold prices lower, and vice versa. Real and expected inflation rates also affect the price of the metal. Gold purchases by central banks have an impact on the price, as does the demand for gold to be used in jewelry and technological devices.
Should I Invest in Gold?
Gold adds an important layer of diversification to an investment portfolio because it has shown a negative historical correlation with other asset classes. In other words, when investments such as stocks and bonds falter, gold tends to outperform. Investment exposure to gold is useful to hedge against inflation and to add a measure of safety to your portfolio in difficult economic times.
The Bottom Line
We have long been, and will likely continue to be, enamored by gold. Today, the demand for gold, the amount of gold in the central bank reserves, the value of the U.S. dollar, and the desire to hold gold as a hedge against inflation and currency devaluation all help drive the price of the precious metal.
