What Factors Determine The Price Of Gold?

POSTED ON December 28, 2020
What Factors Determine The Price Of Gold?

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factors determining the price of goldGold can be a volatile metal. Not in the chemical sense, it’s actually one of the least reactive chemical elements and is solid under standard conditions. When we say gold is volatile, we are talking about the price of gold, which can rise to great heights or take exhilarating nosedives depending on a number of different factors.

Despite the fact that gold prices can move substantially, gold is still considered to be one of the most popular and stable forms of investment. Also, it is highly sought after for a number of different applications, such as jewelry and the manufacturing of certain electronic and medical devices. And across the world, thousands of people are choosing to invest their money in gold, gold ETFs, and gold futures. 

With how the precious metal is performing in recent times, this desire to invest in gold is understandable. Gold price development in the past few years has been predominantly positive. In fact, the highest price of gold was achieved in August of 2020 — 2,032.16 USD per troy ounce — and while it has taken a dip since then, the price still remains fairly high, which makes it a very attractive option for people looking to invest. 

You may be interested in investing in gold yourself, or deciding if you should, so you might be wondering what factors affect the price of gold.

Let’s take a closer look at them.

Factors That Determine The Price Of Gold

Central Bank Reserves

Central banks keep both paper currencies and gold within their walls, and obviously, their actions can lead to changes in the price of gold. Most often, it happens when central banks diversify their monetary reserves. As they convert their paper currencies into gold, the price of gold will rise.

Since many of the world’s central banks keep converting their paper money into gold, there is a general upwards trend in the price of gold. In fact, according to Bloomberg, central banks around the world have been the foremost buyers of gold since 1971, when the U.S. abandoned the gold standard.

Supply And Demand

Supply and demand is a basic economic concept and is sometimes overlooked as a driving influence in the pricing of gold. Seeing as how gold is a commodity that is continuously in demand, the laws of supply and demand actually play a large part in the price of gold.

When there is an increased demand with a low supply, the price of gold will rise, as with any other good. Similarly, when there is an oversupply of gold with little or stagnant demand, the prices will drop.

Unfortunately for buyers, we’re in a time where there is more demand for gold than there is supply. According to the World Gold Council, in 2019, jewelry accounted for approximately half of gold demand — over 4,400 tonnes. Another 7.5% of demand is attributed to technology and industrial uses for gold, where it is used in the manufacturing of medical devices like stents and precision electronics like GPS units. Additional World Gold Council data shows that the demand for gold in Q3 of 2020 is 2,972.1 tons year-to-date (10% below the same period of 2019) while supply is actually just 1,223.6 tons (a 3% drop from 2019). These numbers clearly show a large gap between the demand and supply for gold and with such a large gap, and this gap probably played a part in the historic high gold prices reached in August.

2020 ytd gold price

Source: ycharts.com

Gold Mining Production

When talking about supply and demand of gold, we should also take a look at the major players in gold mining across the world. China (383.2 tons), Russia (329.5 tons), Australia (325.1 tons), the United States (200.2 tons), and Canada (182.9 tons) take the top five spots for worldwide gold production. However, despite these large numbers, there has not been a significant increase in gold mining production since around 2016.

The main reason for that is the fact that most of the “easy gold” — that is, gold reserves that are easily accessible — have already been mined. Now, miners have to dig deeper to find sizable, quality gold reserves. This introduces several problems to the mining process, such as additional danger for the miners and an increase in the negative environmental impact. To put it simply, we are now spending more to get less gold. Of course, this increases the costs of gold mine production, which will directly cause an increase in the price of gold.


Inflation, or the rising price of goods and services, can also play a part in increasing the price of gold. The usual trend with inflation is that the higher the inflation is, the higher the gold price will be, and vice versa.

Generally, inflation is a sign of economic growth and expansion. When the economy of a country is growing and expanding, the supply of money will be increased. When that happens, the value of each existing piece of currency in circulation will be diluted, which makes it more expensive to buy assets like physical gold, which have a more fixed value. 

When inflation remains high for extended periods of time, gold can act as a hedging tool to offset the effects of the inflation. Physical gold is considered stable in the long run when compared to fluctuating currencies.

Interest Rates

Unlike inflation and gold, interest rates and gold have an inverse relationship. That is, when interest rates increase, gold prices go down and when they decrease, gold prices go up. However, it is of note that there is actually little solid correlation between gold prices and interest rates. According to Investopedia, rising interest rates may even have a positive effect on the price of gold.

There is a constant push-pull between interest rates and inflation and this tends to add even more volatility to gold prices.

Currency Fluctuations

Understandably, the price of gold can also be strongly influenced by fluctuations in currency. Very specifically, the U.S. dollar, since the price of gold is dollar-denominated.

The relationship between these two are also inverse. Providing that everything else remains the same, a stronger U.S. dollar will keep the price of gold lower and more controlled. A weaker U.S. dollar, on the other hand, will increase the price of gold by increasing demand (since more people will purchase more gold when the dollar is weaker.)

In 2020, the U.S. dollar has not been having a great time. Since reaching a peak in March, the dollar fell 10% against other currencies including a 5% slide in late June. In fact, the U.S. dollar has fallen to its lowest values since early 2018. This is due to a number of factors, with the COVID-19 health crisis being at the forefront. This weakness in the U.S. dollar has been great for gold prices, however, along with other currencies and commodities around the world which have increased in value.

US dollar vs gold prices


While “uncertainty” is quite vague on its own, what it means in relation to gold prices is that the stock market prefers certainty. Any sort of political instability, geopolitical turmoil, or similar issues cause uncertainty and during such times when most other commodities drop in value, gold is the perfect way to store funds because it has enduring value. The enduring nature of gold makes it a viable “safe haven” for investors during turbulent times.

Take a look at the current state of the world. COVID-19 reigns supreme across the world, there is a long drawn out political fisticuffs between the 45th President of the United States Donald Trump and President-Elect Biden, UK and Europe are both still dealing with fallout of Brexit, many civil rights movements are taking place across the world, and there are constant terrorist threats — all of these factors contribute to the increase in global growth uncertainty, which will in turn cause an increase in gold prices.

However, one must keep in mind that unlike many of the other factors listed above, uncertainty is not quantifiable. It is a psychological factor, something that is unique to each investor and to each global crisis.

Economic Data

U.S. economic data also plays a part in gold prices. Data such as the jobs reports, wage data, manufacturing data, and broader-based data such as GDP growth, all influence the Federal Reserve’s decisions on monetary policy, which will in turn affect gold prices.

The general trend with economic data and Federal Reserve’s monetary policy is that a stronger U.S. economy — one with low unemployment, increase in jobs, expansion in manufacturing, and a GDP growth — will reduce the price of gold. A weaker U.S. economy, on the other hand, with weaker jobs growth, rising unemployment, weakening manufacturing data, and low GDP growth will do the complete opposite and increase the price of gold.

Electronic Traded Funds (ETFs)

ETFs play quite a small role in gold prices. In fact, among all the reasons listed here, ETFs are likely the smallest influencer of gold prices. They are not designed to make any significant changes to the market, but it is worth learning about them, as they also provide great investment opportunities.

According to Wikipedia, ETFs are “a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges while mutual funds are bought and sold based on their price at day’s end.”

Essentially, they are basket funds that provide investors with increased liquidity and the potential ability to spread their risks over a large number of assets for a minimal cost. SPDR Gold Shares ETF — the largest gold ETF — buys and sells physical gold bullion based on demand from investors. When that demand changes, prices will also be affected as the purchasing/selling activities will change.

There has been a general inflow of cash into gold ETFs. In 2019, 29% of the total demand for gold was from gold ETFs (according to the World Gold Council) and gold ETFs have surpassed 1,000 tonnes of new demand in 2020, which will have a positive impact on the price of gold.

Putting The Price Of Gold To Good Use

The many factors discussed above all contribute to the growth or decline in gold prices. If you take a look at the current state of the world and consider the above factors, it’s quite easy to see why gold prices are in a good place right now. In fact, it is the above factors that have led to experts projecting that gold prices will actually increase in 2021.

But as always, you must keep in mind that all of these factors can change at the drop of a hat, and gold prices can always take sudden turns. With this in mind, you need to be aware of the options you have to deal with any gold that you may currently have.

Selling Gold

The best way to take advantage of the current price of gold — $1,885.50 USD per troy ounce as of writing — is to sell the old gold that you have. And there is no better place to sell your gold online than with us at Cash for Gold Mailer.

From 10K gold (which is often found in jewelry) to 24K gold (which is what you’re likely to have if you’re investing in gold) and everything in between, at Cash for Gold Mailer, we buy everything and we pay you a fair price for it. Whereas some other online gold buyers will only pay as little as 25% of the value of your gold, we pay much more – and we post our prices!

If you sell now, you can take advantage of the current high price of gold and make a neat sum in return for the gold you have, but if you decide to wait it out, see whether gold prices actually do increase, and want to sell it later, we’ll be ready to buy your gold then, too.

Ready to sell your gold? Get started by requesting a kit now!


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