What Drives Gold Prices?
Gold doesn't have earnings, dividends, or cash flows. So what moves its price? Understanding these 7 factors will help you make sense of gold's market behavior.
1. Interest Rates
The most important short-term driver of gold prices.
The relationship: Gold pays no yield. When interest rates rise, bonds and savings accounts become more attractive. When rates fall, gold's zero-yield is less of a disadvantage.
Rates ↑
Gold tends to fall
Rates ↓
Gold tends to rise
Key nuance: It's real interest rates (nominal rate minus inflation) that matter most. If rates are 5% but inflation is 7%, real rates are -2%—great for gold.
2. U.S. Dollar Strength
Gold is priced in dollars, creating an inverse relationship.
The relationship: When the dollar strengthens against other currencies, gold becomes more expensive for international buyers—reducing demand. When the dollar weakens, gold becomes cheaper globally—increasing demand.
Dollar ↑
Gold tends to fall
Dollar ↓
Gold tends to rise
Watch the DXY (Dollar Index) for correlation with gold movements.
3. Inflation & Inflation Expectations
The classic relationship: Gold is historically seen as an inflation hedge. When prices rise, currency loses purchasing power, and hard assets like gold become more attractive.
The reality: The relationship isn't perfect. Gold didn't perform well during 2022's high inflation because the Fed raised rates aggressively. But over decades, gold has preserved purchasing power against inflation.
What matters most: Unexpected inflation (higher than anticipated) is most bullish for gold. Anticipated inflation is usually already priced in.
4. Central Bank Buying
Central banks are major gold holders and buyers.
Recent Trends
- • Central banks have been net buyers since 2010
- • China and Russia have dramatically increased reserves
- • De-dollarization trends driving gold accumulation
- • 2022-2024: Record-high central bank purchases
When central banks buy, it reduces available supply and signals confidence in gold as a reserve asset—both bullish factors.
5. Geopolitical Uncertainty
Safe-haven effect: During wars, crises, or political instability, investors flee to gold. Unlike stocks or bonds, gold has no counterparty risk and is universally valued.
Examples:
- • 2020 COVID crash: Gold hit all-time highs
- • 2022 Russia/Ukraine: Gold spiked on invasion
- • 2023-2024 Middle East tensions: Support for gold
Note: The safe-haven effect is usually short-term. Once the immediate crisis passes, gold often gives back some gains.
6. Investment Demand (ETFs & Funds)
Gold ETFs have become major market movers.
How it works: When investors buy gold ETFs (like GLD or IAU), the funds must buy physical gold to back the shares. When investors sell, the funds sell gold.
Impact: ETF flows can create significant buying or selling pressure. Track ETF holdings for clues about institutional sentiment.
7. Jewelry & Industrial Demand
Physical demand still matters, especially from Asia.
Jewelry Demand
- • ~50% of annual gold demand
- • India & China are largest markets
- • Wedding seasons drive demand
- • Diwali, Chinese New Year peaks
Industrial Demand
- • ~7-8% of annual demand
- • Electronics, dentistry, aerospace
- • Stable but not a major price driver
Factors Summary
| Factor | Gold Bullish | Gold Bearish |
|---|---|---|
| Interest Rates | Falling rates | Rising rates |
| U.S. Dollar | Weakening | Strengthening |
| Inflation | Rising unexpectedly | Under control |
| Central Banks | Buying gold | Selling gold |
| Geopolitics | Uncertainty/Crisis | Stability |
| Stock Market | Crashing | Booming |
Key Takeaways
- • Real interest rates are the single most important factor
- • Dollar weakness tends to boost gold prices
- • Crisis events create short-term spikes
- • Central bank buying provides long-term support
- • No single factor explains everything—they interact
- • Gold often does the opposite of what "makes sense"