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What Factors Determine Gold Prices?

By Justin Riche
Updated Jan 28, 2024
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There are numerous factors that determine gold prices, but just like any other commodity, they are largely influenced by the laws of supply and demand. This demand mainly comes from those who produce and sell jewelry and electronics, but dentistry has a major use for gold, and gold also is demanded for monetary reasons and as a store of value. Gold is mainly supplied by companies who explore gold mines and the amount available for supply, and how much is demanded at any given time will affect gold prices. Moreover, on a daily basis, the volume of gold trading, whether in the physical form or through electronic means, will help determine gold prices. Other factors that will help determine the price of this precious metal include geopolitics, war, natural disasters, major governments' economic policies, the climate of the world economy and more.

Jewelry makers and sellers are the major participants in the gold market, so when there is a demand for jewelry, gold prices usually will soar, or they will drop if demand is weak. Gold is an efficient conductor of electricity, so manufacturers of electronics also have a major need for gold. The chances for gold to rust are very remote, so it is widely used in dentistry. It can be used to create dental fixtures, and this is done by alloying it with other metals.

The monetary uses for gold include the reserve holdings of central banks. The amount held does change for various reasons. Physical gold is also held for investment purposes by private investors. Moreover, there are gold coins that are legal tender in certain countries, such as South Africa and Canada.

When major currencies, such as the US Dollar, were removed from the gold standard, which was an agreement for the main global currencies to base their paper money on the value of gold, consumer prices experienced a constant hike as a result, which pushed the prices of gold up simultaneously. This is because abandoning the gold standard made it easier for governments to almost print as much money as they desired, therefore making it easy to create inflation. This factor is still valid, because rising inflation usually makes people invest in gold to help preserve wealth, which generally boosts the gold price.

The US Dollar is used as a global reserve currency, so prices of gold are generally denominated in US Dollars. Moreover, the US Dollar and prices of gold have an inverse relationship in most cases; that is, when the former declines, the latter appreciates, and vice versa. For example, when there was a threat of a double-dip recession in the United States economy in 2010, the value of the US Dollar plummeted against most other major currencies while gold prices soared.

Individuals and institutions invest in gold by buying gold bullion, gold bars and gold exchange-traded funds (ETFs), among other ways. All of these types of investments have an effect on gold prices. The speculative element in the gold market also contributes to prices. When speculators buy gold or sell gold futures or ETFs and through other gold trading vehicles, their participation in this market has an impact on gold prices.

Furthermore, there is what is called the London Gold Fix, where spot gold prices are fixed on a daily basis, and this fix is used worldwide as a benchmark for gold dealers. One can monitor the futures market to gauge where the price of gold might be heading. This is because the major producers and consumers of gold, even large speculators, participate in the futures market, which influences the prices somewhat.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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