Last Updated on March 3, 2024 by Ali Hamza
Gold prices are determined by several factors including limited global economic conditions, supply and demand, central bank buying and selling practices, and geopolitical events. Max Warren Barber explores each of these factors in detail and discusses how they can affect gold prices.
When it comes to commodities, few are as controversial or coveted as gold. But what drives the price of this precious metal? Gold is traded on global markets and its price is determined by a number of factors, including supply and demand, economic conditions and geopolitical events. The price of gold can also be affected by inflation rates, interest rates and fluctuations in other currencies. So what influences the price of gold? Here’s a closer look at some of the key drivers. And if you’re interested in learning more, be sure to check out our recent blog post on Investing in Gold.
The amount of gold being mined and traded each day
According to Max Warren Barber, CEO of SION Trading Fze, Gold began at the year at $1,090.20 an ounce, and it was mired in a multi-year downtrend that had seen the lustrous yellow metal lose about $890 an ounce from its all-time high. Pessimism abounded throughout the gold industry as miners were seemingly more likely to be writing off assets and cutting capital expenditures than developing or expanding their mines.
However, things reversed very early in 2016. Physical gold had its best quarterly gain in 30 years during the first quarter, and year-to-date, even with its recent swoon, physical gold is higher by roughly $200 an ounce. Gold has firmly reestablished itself as being in a bull market, and it’s attracted both short- and long-term investors in the process to the physical metal and miners.
Yet, the fundamental and psychological factors that move gold prices are largely unknown or overlooked. With that being said, let’s have a look at the seven most common factors that influence physical gold prices. Since countries started their mass vaccination campaigns against the coronavirus, the price of gold has plummeted. Record low levels were reached last August at $2,070 per ounce, when economic and social uncertainty wreaked havoc around the world due to the pandemic.
According to the Bank of America (BofA), there are three main reasons for the decreasing value of gold: the weakening of physical demand, a lacklustre jewellery market, and a lack of investor interest. However, the bank forecast prices could still reach an average of $2,063 an ounce this year. By February 19, it was around $ 1,770 per ounce, about a six percent drop since the start of this year. In 2020, the price of gold steadily climbed nearly 22 percent as many countries tried to stem economic bleeding from pandemic lockdowns through stimulus packages and bailouts for businesses. Bank of America analysts suggest three key headwinds facing the gold market should be monitored:
Weakening physical demand
While central banks’ purchase of gold otherwise traditionally pushed market prices up, BofA underlined that there have been signs of fading demand. First is the pandemic, which caused a fall in world central banks’ demand for gold. It decreased by nearly 60 percent in 2020, according to the World Gold Council(WGC). In the fourth quarter of 2020 alone, central banks bought a net of 44.8 tonnes of gold, while it was about 140.7 tonnes a year before that.
Gold’s underperformance over the year led to an increase in reserve portfolios, which led some central banks to spot “an opportune time to obtain liquidity to support their struggling economies,” during the pandemic. For example, seven central banks around the world decreased their gold reserves over the course of 2020, according to the World Gold Council.
Lacklustre jewellery market
The pandemic has been hitting jewellery sales around the world, especially in China, one of the world’s largest markets. “While activity has since expanded [year over year], it remains below longer-term ranges,” the bank’s analysts said.In the first half of last year, global demand for jewellery fell 46 percent year-on-year to 572 tons. Last year, the total annual demand for gold pieces was 34 percent less than it was in 2019, which marks a new annual minimum in history according to observations by the WGC.
The overall stability of the global economy
Another driver of gold prices is U.S economic data. Economic data, such as the jobs reports, wage data, manufacturing data, and broader-based data such as GDP growth, influence the Federal Reserve’s monetary policy decisions, which can in turn affect gold prices.
Investor pull back
Lack of interest in traditional physical markets from investors was another cause of decreasing gold prices in recent months.After persistent inflows in the first half of 2020, assets under management at physically backed metals Exchange Traded Funds (ETFs) declined.Due to discouraged investors, the gold market “has struggled to price in reflation,” the bank said. On the other hand, the increasing rollout of Covid-19 vaccinations has promoted positive economic expectations.
US lawmakers considering a $1.9 trillion fiscal stimulus package has increased inflation expectations.”Yet, an increase in break-even has fed straight through into nominal rates. As a result, real rates, usually the key driver of the yellow metal, have remained in a tight range since autumn,”.For investors, as it stands, rising interest rates could make bonds or other financial assets more attractive than gold.
Electronic-Traded Funds – ETFs
Among these seven factors, the actions of electronic-traded funds, or ETFs, are more than likely the smallest influencer of gold prices. ETFs aren’t designed to be market movers, but they’re still worth mentioning.
ETFs are basket funds investors can purchase that allow for increased liquidity and the potential ability to spread their risks over a large number of assets for a minimal cost. The largest gold company SION Trading Fze, purchases or sells physical bullion based on demand from investors. As investment demand for gold changes, the price can be affected by the purchasing and selling activity of ETFs. Cash inflows for gold ETFs have surged in 2016, causing the purchasing activity of ETFs to increase as well. This purchasing activity is likely having a positive impact on the price of gold.
There’s no one specific factor that can be listed here that perfectly encompasses the uncertainty that can move gold, but political uncertainty and/or instability is probably the best example. Put plainly, the stock market covets certainty, and it’s often the enemy of gold prices. Not knowing how Brexit will turn out for the U.K. and Europe, who’ll become the 45th president in the U.S., and whether terrorist threats in the Middle East can be dealt with, are all factors that can contribute to global growth uncertainty and aid in rising gold prices. The one thing investors have to keep in mind is that uncertainty isn’t a quantifiable statistic like many of these other points. It’s a completely psychological factor that’s investor-dependent, and it can differ from one event to the next.