What Drivers Influence the Price of Gold?
- Apr 11, 2023
- loveGOLD
- 1 minute read
In terms of how the price of gold is determined from the point of view of what drives it, the World Gold Council (WGC) has done a lot of research and created some online tools to help understand how gold reacts to different drivers.
There are a lot of individual factors that can influence the behavior of gold, which is the same with any asset. The WGC has found through analysis that many of them reflect buyer and seller motives and they group these factors into four broad categories:
- Economic Expansion
- Risk and Uncertainty
- Opportunity Cost
- Momentum
Economic Expansion
Reflects wealth and income and they are really important drivers of gold, particularly over the long-term. As wealth and income grow, we see a greater demand for gold jewelry, an increase in use of gold in technological applications as well as an increase in long-term savings.
Risk and Uncertainty
Gold is historically viewed as an effective diversifier against risk. When there are perceptions that market risk is elevated or that there are times of broader economic, geopolitical uncertainty, we tend to see that reflected in a surge in investment demand for gold.
Also within this category is inflation. Gold has historically performed well as a long-term hedge against inflation. At times where there is a perception of a long-term increase in inflationary pressures, we tend to see that feed through to the price via strength of investment demand.
Opportunity Cost
This addresses gold’s typically negative relationship with interest rates and bonds. When you see those rates increase, that tends to be reflected in a decrease in investment demand for gold. There's also a foreign exchange aspect. Gold, as well as being negatively related to interest rates, tends to be negatively related to the US Dollar. As US interest rates and the US Dollar strengthen, we see the equivalent decrease in investment demand for gold.
Momentum
This category is largely concentrated in the investment. It takes into account the trend of what's happening in the gold price and generally reflects demand for ETFs. We see that in periods of strong demand for ETFs, particularly if it's accompanying a strong rise in the gold price, it tends to adopt this element of momentum attracting more flows to the gold price.
In terms of how the price of gold is determined from the point of view of what drives it, the World Gold Council (WGC) has done a lot of research and created some online tools to help understand how gold reacts to different drivers.
There are a lot of individual factors that can influence the behavior of gold, which is the same with any asset. The WGC has found through analysis that many of them reflect buyer and seller motives and they group these factors into four broad categories:
- Economic Expansion
- Risk and Uncertainty
- Opportunity Cost
- Momentum
Economic Expansion
Reflects wealth and income and they are really important drivers of gold, particularly over the long-term. As wealth and income grow, we see a greater demand for gold jewelry, an increase in use of gold in technological applications as well as an increase in long-term savings.
Risk and Uncertainty
Gold is historically viewed as an effective diversifier against risk. When there are perceptions that market risk is elevated or that there are times of broader economic, geopolitical uncertainty, we tend to see that reflected in a surge in investment demand for gold.
Also within this category is inflation. Gold has historically performed well as a long-term hedge against inflation. At times where there is a perception of a long-term increase in inflationary pressures, we tend to see that feed through to the price via strength of investment demand.
Opportunity Cost
This addresses gold’s typically negative relationship with interest rates and bonds. When you see those rates increase, that tends to be reflected in a decrease in investment demand for gold. There's also a foreign exchange aspect. Gold, as well as being negatively related to interest rates, tends to be negatively related to the US Dollar. As US interest rates and the US Dollar strengthen, we see the equivalent decrease in investment demand for gold.
Momentum
This category is largely concentrated in the investment. It takes into account the trend of what's happening in the gold price and generally reflects demand for ETFs. We see that in periods of strong demand for ETFs, particularly if it's accompanying a strong rise in the gold price, it tends to adopt this element of momentum attracting more flows to the gold price.
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