Gold is a pretty unique asset—it’s both a rare commodity and a popular investment. Unlike typical stocks, its price can swing quite a bit, influenced by a wide range of factors. These can be broken down into long-term, medium-term, and short-term influences.
- Economic Growth and Wealth
The price of gold over the long haul, is closely linked to how well economies are doing. When economies are thriving, the demand for gold, especially in the form of coins, bullion, and gold-backed investments, tends to go up. But gold is usually bought in bulk by wealthier people since it’s considered a luxury. For instance, as China’s economy has boomed, private demand for gold has surged.
- Central Banks and Currency Reserves
Central banks have a big impact on the gold price through their gold reserves. They’ve been steadily increasing their holdings, with global reserves currently at about 34,789 tonnes, including 10,776 tonnes held by Eurozone banks. If central banks decide to sell off large amounts of gold, it could flood the market and push prices down.
- Industrial Demand and Gold’s Many Uses
Gold isn’t just for jewelry—it’s used in lots of industries. For example, the automotive industry in Europe uses around 440 tonnes of gold. It’s also key in the chemical industry as a catalyst and in medical tests. Plus, gold’s properties make it essential in tech, like smartphones and wearables, which are expected to grow, helping to support gold prices.
- Mining Costs and Supply Issues
Gold is expensive to mine and hard to find. With no major new gold deposits discovered since 2012, and existing sources possibly running out within the next twelve years, supply constraints could push prices up. Right now, mining gold costs about $1,150 per troy ounce, and developing new deposits could raise that to $1,500. Recycling is becoming more important too, already covering 30% of global demand.
- Inflation
High inflation has historically driven gold prices up. Central banks see gold as a hedge against inflation, but when inflation is moderate, it might not boost gold prices much, especially if inflation-linked bonds offer good returns.
- Interest Rates
Interest rates play a big role in gold prices. Gold doesn’t pay interest or dividends, so when interest rates rise, it becomes less appealing. But when rates are low, as they have been in recent years, the gold price also benefits. The effect of interest rate changes on gold prices can vary depending on how big the change is and in which direction.
- Currency Movements
The US dollar has the biggest influence on gold prices since gold is mainly traded in dollars. A strong dollar usually means lower gold prices, while a weaker dollar tends to boost them. However, gold prices tend to rise more sharply when the dollar is weak.
- Stock Market Trends
When the stock market is doing well, stocks can be more attractive. However, even in good times, fears of future crises can drive people to invest in gold, as seen from 2018 to 2020 when gold prices went up despite strong stock market performance.
- Geopolitical Uncertainty and Investor Behaviour
Geopolitical events, like conflicts in the Middle East, Russia’s invasion of Ukraine, and other global issues, can have a big impact on gold prices. So can elections, political tensions, and natural disasters—basically anything that shakes up the world can affect gold prices. This makes predicting gold prices tricky because there are so many factors at play.
