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Gold is an asset that’s often viewed as a safe haven by investors when times get tough. It has a long track record as a store of value, which gives some investors comfort when the rest of the investment landscape feels uncertain.
But what exactly drives the price of gold higher and lower? Here are four things that can do just that.
4 things that drive gold prices
1. Inflation and inflation expectations
Gold is viewed by many investors as a hedge against inflation, so it’s no surprise that the level of inflation and expectations about future inflation can have a major impact on gold prices.
Gold prices jumped 25 percent in 2020 amid the COVID-19 global pandemic as inflation began to ramp up. Over the past 15 years, the popular SPDR Gold Shares ETF (GLD) has returned about 6.2 percent annually, which has outperformed the annual inflation rate of about 2.6 percent.
2. Supply and demand
The price of gold can also be impacted by supply and demand. The supply can change based on how much is mined by gold mining companies, while demand can rise and fall due to different factors such as jewelry production, investment demand and central bank holdings.
In recent years, central banks have increased their demand for gold as they look to diversify away from the U.S. dollar after the U.S. froze the central bank assets of Russia following its 2022 invasion of Ukraine.
3. U.S. dollar
Like many other commodities, gold is denominated in U.S. dollars. When the dollar is strong, gold prices will typically be lower, while a weak dollar should send gold prices higher. To be sure, there are other factors at play, so the relationship between the dollar and gold may not be perfect.
One of the reasons gold is viewed as a good inflation hedge is because as the dollar loses value over time, gold prices should rise to account for the changing value.
4. Economic uncertainty and geopolitical events
Gold also has a history of performing well during periods of economic uncertainty or geopolitical upheaval. Some investors are drawn to gold amid these periods of heightened risk because of the metal’s history as a safe-haven asset.
In 2008, when stocks plummeted as the global financial crisis unfolded, gold was actually up about 4.3 percent for the year. More recently, gold prices held steady in 2022 even as stocks fell due to concerns about high inflation, rising interest rates and a possible recession.
How to invest in gold
Investors who are looking to invest in gold have a few ways to gain exposure to the precious metal.
- Physical gold: The most direct way to invest in gold is by purchasing the physical asset itself, such as a gold bar. But you’ll need to store the gold once you’ve bought it and insure it in case it’s stolen.
- Gold ETFs: One of the simplest ways to get exposure to gold is through gold ETFs that track the price of the commodity. With gold ETFs, you won’t have the hassle of storing or insuring physical gold and get the added benefit of greater liquidity when the time comes to sell.
- Gold mining stocks: You can also purchase shares of mining companies that are involved in gold production. These companies should benefit from rising gold prices and may be able to grow their earnings by increasing production. You could also buy an ETF that holds a basket of mining stocks to diversify your holdings and reduce some of your risk.
- Gold futures: Futures are a way to speculate on the future price of gold, and leverage may allow you to get more exposure than you could using more traditional methods. However, be aware that leverage cuts both ways, and futures trading is probably best left to experienced traders.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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