What Drivers Influence the Price of Gold?
- Apr 11, 2023
- loveGoldᵀᴹ
- 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.
Insights provided by the World Gold Council
Important information and disclosures
© 2023 Royal Canadian Mint. All rights reserved. © 2023 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
The links to websites provided are available in English only and are owned or operated by third parties. By accessing a third-party website, you understand that it is independent from the Royal Canadian Mint (“the Mint”) and that the Mint has no control over the content of such third-party websites and cannot assume any responsibility for materials created or published by such third-party websites. In addition, a link to a third-party’s website does not imply that the Mint endorses the website, the information or the content of such website. It is your responsibility to ensure that you review and agree to terms and conditions applicable to such websites before using it. Please note that the Mint is not responsible for webcasting or any other form of transmission received from any linked website.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. Information and statistics are copyright © and/or other intellectual property of the Mint and/or World Gold Council or its affiliates (collectively, “WGC”) or third-party providers identified herein. All rights of the respective owners are reserved.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus, Refinitiv GFMS or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
WGC and the Mint do not guarantee the accuracy or completeness of any information nor accepts responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is for educational purposes only and by receiving this information, you agree with its intended purpose. Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person. You should directly consult your financial professional or other advisors before acting on any information.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. WGC does not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and assumptions and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. WGC and the Mint assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither the Mint, WGC nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.