What affects the price of gold? Simply put, when uncertainty looms, people turn to gold for security. In this article, we’ll explore the key factors driving gold prices and how they work together.
Investors buy gold during times of economic uncertainty. Take Covid-19. In August of that year, gold reached an all-time high of over $2,070 per ounce. And now, in 2024, it’s up over 30%, with 77% of Americans worried about the economy, alongside concerns over the Russia-Ukraine war and conflicts in the Middle East.
Gold prices represent investor’s sentiment about global events. This article explains what affects gold prices and how to leverage this knowledge for investment decisions.
History of gold bullion
For centuries, many nations operated under the gold standard, which directly linked the value of their currencies to gold. This system provided stability and limited inflation since the amount of currency in circulation directly aligned with a nation’s gold reserves.
The collapse of the Bretton Woods system in 1971 changed everything. This system, which started in 1944, linked the value of money worldwide to the US dollar. Countries could then trade their dollars for a set amount of gold.
After 1971, governments let their currencies’ values change freely. This meant the U.S. dollar’s value could fluctuate independently from gold’s price. Often, when the dollar’s value went down, gold’s price went up, and vice versa.
In the past few decades, gold prices go up and down because of world events. In the 1970s, gold prices shot up during high inflation. People turned to gold because it kept its worth when other investments didn’t. But, in the early 1980s, when the U.S. government tried to fix this problem by quickly raising interest rates, gold prices fell sharply.
During the 2008 financial crisis, people got scared about their investments and bought more gold as a safety net. This happened again during the COVID-19 outbreak. When investors are uncertain, they turn to gold to protect their money.
Gold exchange-traded funds (ETFs) emerged in 2004. These funds let people buy and sell gold-related financial products like stocks and bonds. These financial instruments increased investor’s exposure to gold.
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Supply and demand
Like any other investment, the value comes down to supply and demand. Specific to gold, someone recently asked in the Reddit r/Gold forum, “why is gold valuable”. User HerboClevelando shared:
“Because it is one of the few things in this world which possesses the seven characteristics of money: Medium of Exchange, Unit of Account, Durable, Divisible, Portable, Fungible, Store of Value.”
Another user, ApprehensiveSorbet76 shared:
“Central banks have a lot of it and they’re the ones who issue/control all the other money. This is the main reason why gold is valuable and it needs to be studied with a unique perspective. This is what separates gold from other commodities.
Think about it, why does the US Treasury have 8000 tons of gold when the Federal Reserve Note is the money now? Shouldn’t they hold dollars in reserve? And what practical purpose do they use it for? They don’t manufacture and sell jewelry, PCBs, etc, so these are not the reasons why they have it or why it has value.
The gold gives central banks a lot of power to perform financial gymnastics in emergency situations.”
We’ll cover these in more detail, plus other factors impacting gold prices:
Gold production and supply
There’s only so much gold in the world. And while mining brings new gold to market, it isn’t easy or cheap. As easily accessible gold becomes scarce, mining companies need to dig deeper to reach reserves. This adds complexity and expense to mining operations. Deeper mining also increases environmental consequences and safety risks.
Key countries that mine gold include:
China
South Africa
United States
Australia
Russia
Peru
Industries driving gold demand
Gold jewelry remains a driver of demand, especially in countries like China and India, where it holds cultural significance. Changes in consumer preferences and cultural shifts in these large markets can impact demand and real gold prices.
Technology and industrial uses like electronics and medicine also increase demand. The growing field of artificial intelligence also relies on gold since it’s incorporated into these advanced technologies. This growing reliance on this precious metal for new technologies means that continued expansion in these sectors could increase the price of gold.
Investment demand for gold
In recent years, more people have started buying gold as an investment. Many people use gold to balance their investments or protect against economic uncertainty. And investors like that gold’s performance doesn’t always follow other asset classes.
This demand means gold prices change more frequently based on what investors think and what’s happening in the world. You’ll see that prices rise due to factors like:
Economic uncertainty: Recessions or financial crisis scenarios lead investors to seek the perceived safety and stability of gold.
Inflation fears: When inflation erodes the purchasing power of fiat currencies, people turn to gold as a way to preserve their capital.
Currency devaluation: Concerns about the weakening of fiat currencies and the U.S. dollar increase demand, people see gold as a stable alternative.
Low real interest rates: When interest rates are low or negative people buy gold which they see as a better investment compared to bonds or other interest-bearing assets.
Geopolitical instability: Global events such as wars and political upheaval trigger investor’s flight to safety. Gold’s track record as a safe haven asset benefits from these periods of heightened uncertainty.
Central banks buying gold
Central banks buy foreign exchange reserves to:
Stabilize their currencies
Manage exchange rate risks
Provide liquidity in times of crisis
Diversify their portfolio holdings
In the past several years, central banks have purchases 2.5 times the amount of gold than in prior years. Historically, many countries keep U.S. dollars as savings. But because the dollar’s value fluctuates, other countries seek ways to protect their funds. and some countries worry about U.S. debt and world tensions affecting it’s value. So, they’re buying gold instead as a way to protect their savings.
The chart below from the World Gold Council shows central bank’s plans for increasing gold holdings in the next 12 months:
Adding gold to your investment portfolio
There’s a few different ways you can add gold to your portfolio:
Physical gold
You can buy actual physical gold from a reputable gold dealer like Swiss America. It comes in the form of gold bars or coins and gets shipped to you so you can decide where to store it. To give you an idea of storage needs, the smallest gold bar is the size of a postage stamp. And, the most common large bar for individual investors is about the size of a cellphone.
Gold coins usually come in 1 troy ounce size which is about the size of a silver dollar. One distinction to note is that for gold investment we’re referring to bullion. This is different than numismatic coins which are collectibles that people buy for rarity, age, design, and historical significance.
You’ll also need to consider insurance to protect your gold investment.
Gold IRAs
You can also hold physical gold inside a retirement account. Usually, investors roll over a 401(k), or existing IRA, or set up a new IRA to take advantage of diversifying their portfolio with gold and other precious metals.
Investors holding gold in one of these accounts must work with a self-directed IRA custodian who manages the funds at your direction. IRS rules won’t let you take possession of your gold until you reach retirement age, so your custodian arranges to store your gold in a secure depository.
Gold ETFs
Gold ETFs hold gold bullion or gold-related assets. Investors can buy and sell their shares in these funds on a stock exchange and gain exposure to gold prices. But, because investing in gold this way is a paper asset, you don’t actually own the physical gold.
Gold mining stocks
You can invest in gold mining companies as a way to get exposure to gold prices. This is also a paper asset where you buy shares in the company. Investing in gold mining companies also relies on another party to have strong operations and overall performance.
Gold futures and options
Gold futures and options allow investors to speculate on or hedge against gold price movements. Futures contracts obligate buyers to buy gold at a predetermined price on a future date. Options give buyers the right to buy (call) or sell (put) gold at a specific price before the contract expires.
These can be risky due to several factors like market volatility, leverage, and the potential for large financial loss if the market moves against the investor’s position.
Why gold investors choose Swiss America
For investors seeking a safe way to purchase gold, silver, or other precious metals, it’s important to work with a reputable dealer like Swiss America. With over four decades of experience, Swiss America has supported thousands of satisfied customers with their physical precious metal investments.
Here’s what you can expect if you partner with us:
Expert guidance: Our team offers personalized advice on secure storage, precious metals IRAs, and market insights, helping you make smart investment decisions.
Fair and transparent pricing: We provide transparent and competitive pricing so that you always know the cost of your metals.
Buy-back program: Our buy-back program allows you to easily sell your metals back to us or trade between gold and silver.
Online account access: You can view your holdings, transaction history, and current value of your assets anytime through our online platform.
What influences gold price
As we’ve discussed, multiple factors influence gold prices. While these dynamics may change, one thing remains clear: when people seek a safe-haven asset, they turn to gold.
To learn more about investing in gold or other precious metals, connect with the Swiss America team today!
What affects the price of gold: FAQs
Who determines the price of gold?
Global supply and demand in the market determine the price of gold. Major financial institutions, gold traders, and international exchanges like the London Bullion Market Association (LBMA) help set the gold price through daily trading activities.
Who controls the price of gold?
No single entity controls the price of gold. Market demand, central bank policies, interest rates, inflation, and economic conditions drive gold prices.
How does gold get its value?
Gold gets its value from its rarity, durability, and universal recognition as a store of wealth. Its historical role as currency and its demand in industries like jewelry and technology also contribute to its lasting appeal.
Note: The information in this post is for informational purposes only and should not be considered tax or legal advice. Please consult with your own tax professionals before making any decisions or taking action based on this information.
