What determines the gold price? The key factors

Unlike shares, gold has no profits, dividends or balance sheets by which its value can be measured. The price is set by supply and demand – and these are driven by a handful of major forces.

1. Real interest rates

Gold pays no interest. If interest rates on safe investments such as government bonds rise well above inflation, gold becomes less attractive by comparison. If real interest rates fall, demand often rises. That is why the gold price reacts particularly strongly to decisions by the US Federal Reserve.

2. The US dollar

Gold is traded internationally in US dollars. A weaker dollar makes gold cheaper for buyers outside the US and increases demand. For investors in euros this means: the gold price in euro can develop differently from the price in dollars – if the euro rises against the dollar, the gold price in euro falls, even if it stays the same in dollars.

3. Central bank purchases

Central banks have been among the largest buyers for years. Many countries are expanding their gold reserves to become less dependent on the dollar. This demand is long-term and barely reacts to short-term price fluctuations.

4. Crises and uncertainty

In times of political or economic uncertainty, gold is regarded as a “safe haven”. Wars, banking crises or trade disputes often lead to short-term price jumps.

5. Inflation

Over the long term, gold has largely preserved its purchasing power. In the short term, however, the link with inflation is weaker than many people think – what often matters more is how central banks respond to inflation.

6. Jewellery and investment demand

A large share of annual gold demand comes from jewellery, especially in India and China. On top of that come bars, coins and gold ETFs. High prices typically dampen demand for jewellery.

What does this mean for investors?

Short-term gold price forecasts are unreliable. If you see gold as a long-term hedge, keep an eye on its historical performance – including longer periods of falling prices.

Note: this article is not investment advice.