Factors Impacting the Value of Gold

Factors Impacting the Value of Gold

November 20, 2023

Gold, revered for its diverse range of practical uses, including its function as a form of currency, has maintained its pivotal role in the world of investments since the dawn of civilization. The price of gold is influenced by a combination of several factors, both economic and psychological.

  1. Interest Rates: Gold does not yield any interest or dividends. When interest rates are low, the opportunity cost of holding gold decreases, making it more attractive. When interest rates rise, investors may favor interest-bearing assets over gold.
  2. Inflation: Gold can be used as a hedge against inflation. When the purchasing power of fiat currencies (government-based currencies) decreases due to rising inflation, investors may turn to gold to preserve their wealth, driving up demand and prices. Historically, the price of gold has followed closely with the overall inflation rate, while in some years and decades gold might outperform inflation, the long-term trend is closer to an even relationship between the two.
  3. Currency Strength: The value of the US dollar and other major currencies can impact the price of gold. A stronger dollar can make gold more expensive for holders of other currencies, potentially leading to decreased demand and lower prices. As the price of gold is denominated in dollars, the appreciation of the dollar usually means that gold falls in value whereas the depreciation in the dollar normally means a rise in the value of gold.  
  4. Global Economic Conditions: During times of economic downturns or geopolitical tensions, investors may seek refuge in gold. Viewed as a safe haven asset, investors flock to the metal when tensions/sentiment worsens in markets or geopolitical events.

Additional components driving the price and value of gold include:

  1. Supply and Demand: Like any other commodity, supply and demand plays a significant role in determining the price of gold. If demand for gold increases relative to its supply, prices tend to rise, and vice versa.
  2. Central Bank Policies: Regulatory changes imposed by central banks are having a larger effect on the value of gold and might have serious ramifications in the future. As regulation changes how banks can classify their holdings of real vs. paper gold (tangible gold vs. etf or stock holdings) this changes the landscape on how gold will be traded in the future. 
  3. Market Sentiment and Speculation: Psychological factors, such as positive or negative news, trends, and perceptions about the economy and geopolitical events can influence how investors perceive the value of gold.
  4. Mining Costs: If production costs for mines rise significantly, mining companies might cut production or supply, which could impact prices. Other costs associated with mining such as the cost of diesel have varied effects on the mining industry.
  5. Jewelry and Industrial Demand: Gold has uses beyond investment, including in jewelry and various industries. Changes in demand for these purposes can influence the overall demand for gold and its price.

These are the factors leading to dynamic shifts in gold prices. Gold's role as both a commodity and a financial instrument means that its price is influenced by a wide range of market participants: investors, traders, central banks, and jewelry manufacturers.