What Moves the Price of Gold? A Complete Guide to the Forces Behind It
OroTracker Team ·
No single person, company or government sets the price of gold. It is the outcome of millions of trading transactions that occur daily between jewelers, central banks, investment funds, miners, refiners, electronics manufacturers and just plain folks who are saving. To read a gold chart with confidence, it is necessary to know what moves the decisions to one direction or the other.
This guide outlines the primary driving factors of the gold price, how they relate to one another, and where valuable information can be obtained about each. The price can be traced on the OroTracker live gold chart.
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People sell gold in a global, near 24-hour market
Trades in gold take place over the counter in London, on futures exchanges like COMEX in New York, on the Shanghai Gold Exchange and in dozens of local physical exchanges. The prices are very close together because bullion can be traded between financial centres. The 'spot price' of gold typically refers to the current price for a troy ounce of gold that can be delivered right away in U.S. dollars. Most other prices, everything from futures to the coin in a dealer's showcase, is based on it.
The price of gold is quoted in dollars, so the price in any other currency is dollar price times the exchange rate. Hence, gold can hit a new high in the rupees, pound or yen and trade on a flat basis in dollars.
The supply side: small additions, slow growth
Nearly every gold that was ever mined is still on the earth, and it's not unusual that it is a commodity that remains virtually unchanged. The World Gold Council estimates that there is more than 200,000 tonnes of gold above-ground. New supply can be of two types:
- World Gold Council and USGS estimates are that the production of the mines has been around 3,500 tonnes per year in recent years.
- Recycled gold, most of it from old jewellery that was sold back to refiners, has contributed more than 1,000 tonnes per year.
Discovering, permitting and then constructing new mines is slow to catch up with higher prices, and adds under two percent annually to the stock. This means that the price of gold is significantly more influenced by demand changes than by supply changes - as opposed to oil or wheat. The exception is recycling, where the price increase prompts more people to sell old jewelry, thereby helping to moderate price increases.
Four pillars of the demand side
World Gold Council's quarterly Gold Demand Trends report classifies demand into four categories.
Jewelry
Jewellery demand in terms of volume is the biggest one in the past and is currently concentrated in India and China where gold is associated with marriage, festivals and customs of saving. Jewelry buyers are price sensitive: the more the price rises, the less will be purchased, but the more that may be spent.
Investment
This encompasses physical bars and coins and exchange traded funds (ETFs) backed by gold. The most volatile market is the investment market. It tends to be in an upward trend when the investors are afraid of inflation, financial stress, or geopolitical tension, and drops when interest rates increase and other assets appear more appealing.
Central banks
Central banks have been net buyers of gold since 2010, with annual purchases of over 1,000 tonnes in 2022, 2023 and 2024, all based on data from the World Gold Council.
Technology
The other applications are small, at best, accounting for about seven to eight per cent of demand in recent years, mostly in electronics and dentistry. This part of the group is small and insignificant in terms of price movement.
Interest rates and real yields
There is no interest or dividend paid on gold. The opportunity cost of holding it is the income you would get in a savings account or bond. When interest rates go up, this cost goes up, and the attractiveness of gold, compared to cash and bonds, goes down.
Professional analysts are concerned with real yields - the yield on the inflation-adjusted portion of government securities. Imagine you hold $10,000 worth of gold rather than a bond that yields 4 percent - you sacrifice $400 in income per year. When the bond yield reaches 1 percent, the cost of holding gold drops to $100. Lower real yields increase the attractiveness of gold; higher real yields decrease it.
Real yields were high in 2022 to 2024, but gold did not fall and instead surged due in part to heavy purchases by central banks and some Asian investors. Don't assume that any one relationship is a rule.
The U.S. dollar
The price of gold is in dollars, so a stronger dollar reduces demand for gold from non-dollar holders. While gold tends to rise when the dollar falls, during a global crisis investors seek refuge in both gold and the dollar, so both can rise simultaneously.
Fear and safe-haven demand, inflation
Gold is considered a safe haven asset - not subject to printing or default. It is normally sought when inflation spikes, banks are stressed, or wars and political uncertainty arise. This effect was strong in the high-inflation 1970s but was negative for much of the 1980s and 1990s.
Positioning and sentiment
Short-term trading is often driven by positioning rather than fundamentals. Large funds buy and sell gold futures, and the weekly Commitments of Traders report from the CFTC reveals their positions. The gold price can move swiftly as crowded positions reverse, which is why gold may surge or fade on a day with little news activity.
How do you track these drivers?
No professional terminal is needed. The Federal Reserve Bank of St. Louis' free FRED data comprises:
- DFII10: the 10-year Treasury real (inflation-adjusted) yield.
- DTWEXBGS: a wide U.S. dollar index.
- CPIAUCSL: Consumer Price Index for All Urban Consumers.
Track gold in real time on OroTracker
Frequently asked questions
Who decides the price of gold?
No one does. Prices are set by over-the-counter trading in London and by futures trading in NY, Shanghai and elsewhere. Benchmarks such as the LBMA Gold Price are a representation of the trading, not decrees.
When stock markets are down, why is gold up?
Gold has historically been uncorrelated with stocks and can act as a hedge. This is a tendency, not a guarantee - gold was sold off alongside stocks in March 2020 before recovering.
Does mine supply influence the price of gold?
Only slowly. Production is low relative to the above-ground stock, so demand changes have a larger impact.
If I'm not living in the United States, will the U.S. dollar affect gold?
Yes. Gold is quoted in dollars worldwide, so the dollar exchange rate affects what you pay in your local currency.
Conclusion: Putting it together
What drives the gold price is a confluence of competing forces: the opportunity cost of holding a non-yielding asset, strength of the dollar, fear in the system, and the desire of central banks and savers for a hard asset. The key is to ask - when gold is moving, what has changed in one of these forces?
Sources and further reading
- World Gold Council, Gold Demand Trends (quarterly) and Goldhub.
- International Monetary Fund, International Financial Statistics (reserves in offices).
- Federal Reserve Bank of St. Louis, FRED: series DFII10, DTWEXBGS and CPIAUCSL.
- U.S. Geological Survey, Mineral Commodity Summaries: Gold.
- U.S. Commodity Futures Trading Commission (CFTC), Commitments of Traders reports.
Disclaimer: The information provided in this article is intended for general education and should not be viewed as financial, investment, tax or legal advice. The price of gold has the potential to drop as well as go up. Make financial choices that take into account your own situation and seek advice from a professional.