What Affects the Price of Gold? Factors and Historical Trends
Gold has long attracted investor interest, and its appeal isn’t wavering. Gold prices have increased significantly over the past half a century, with growth in exchange traded funds (ETFs) among the factors driving up the cost of the world’s favorite precious metal.
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But, as with any commodity, predicting the price of gold isn’t a cut-and-dry process. A huge range of factors affect its per-ounce cost, so those interested in buying the precious metal need to understand how, why, and when its price is likely to fluctuate.
If you’re looking to buy real, physical, allocated gold, that you can spend, but would first like to know how its value could change over time, our guide on what affects the price of gold is for you. In it, we cover the factors that drive gold prices, how gold ties into inflation, and our predictions for what your gold reserves could be worth in five to 10 year’s time.
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What Factors Affect the Price of Gold?
While gold is considered a low-risk commodity, its per-ounce price can fluctuate due to several key driving influences. Below, we outline the factors that can affect the cost of gold month on month, year on year.
Demand and Supply
Despite being in use for roughly 5,000 years, gold remains one of the world’s most desirable precious metals – and it’s this which can impact its cost. Global demand for gold remains high, particularly in jewelry and manufacturing industries, so its price is affected by the basic theory of supply and demand (as in, when demand is high, prices rise).
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Hedging and Wealth Protection
The innate value of gold means it can weather more economic uncertainty than other commodities, making it a safer bet for investors during turbulent periods. This, in turn, means it’s a popular hedging option, as it helps protect against economic shock from rising inflation and currency devaluation. Consequently, as more investors hedge on gold, its per-ounce price can soar.
The Value of the US Dollar
Since gold is a dollar-denominated precious metal, its per-ounce cost is directly affected by the value of the US dollar. So, when the dollar is strong, gold prices tend to be lower, and vice versa when its value drops. This is because investors want more gold for their money, so may wait until the dollar is weak before purchasing. The eventual knock-on effect is a higher per-ounce price due to increased demand.
Geopolitical Crises and World Events
Remember: gold is considered a safer bet for investors, so in times of global crises or geopolitical disruption, its demand can soar. The metal outstrips all other assets in terms of economic viability and stability. This is because gold’s cost of acquisition and product is rarely hit by significant fluctuations, the element is incredibly durable, and the supply is high enough to comfortably meet demand.
So, it remains the go-to fallback option when economies take a turn. Naturally, this increased demand for gold can cause significant price spikes.
Demand from ETFs
Gold is a popular asset within ETFs, where it’s bought and sold like shares. Unsure what an exchange traded fund is? Think of it as an investment vehicle, whereby investors can buy and sell commodities (such as gold) on a stock exchange like regular stock. Currently, ETFs represent a significant share of total gold demand volume, and thus have a major impact on its per-ounce cost. Note that at Glint, we do not deal with ETFs, the gold you buy with Glint is real, solid, allocated gold. There is nothing that stands between our clients and their gold.
Gold Production
Don’t forget that, unlike other modern assets, gold is a physical commodity available in finite quantities. That means gold production must come into the pricing equation, with the metal’s real-time supply volume affecting cost in the same way as demand. And, as time goes on and mining becomes more complex, we’ll likely see gold’s innate value increase as its raw material becomes more scarce.
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The Price of Gold Over Time – And Why it Matters
While gold is considered a stable asset, its value has fluctuated significantly over the past century. But why should this matter? And what can historical gold values tell us about where prices might go in the future?
When choosing the best time to buy gold, investors pay careful attention to historical pricing data. That’s because it can reveal a lot about the gold market’s current state of play, and how the metal’s price could change in the weeks and months to come.
For example, in 2011, the per-ounce cost of gold hit an all-time high of around $2,000. Since then, it has dropped back a little, but many analysts see this as only temporary, and predict that gold will continue this upwards trajectory in the longer term.
Historical pricing data can also help investors spot the right time to buy gold from a demand perspective. For instance, when a weakened US dollar caused the price of gold to drop in the past, at what point did it start to rise again as demand grew? Such analysis can help reveal the best time to buy to guarantee maximum value from your gold.
By understanding historical gold prices, you can make assumptions about the metal’s future trajectory, and make better-informed decisions about the right time to buy and sell.
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How to Predict Future Gold Prices
Much like for other commodities, predicting the future value of gold is difficult, and there’s a simple reason for this.
Commodity markets are like auctions. People seek to buy before the price rises, but by doing so, drive the price up. This is the nature of supply and demand within a physical asset market such as gold; demand will always cause prices to go up.
Of course, it is possible to make assumptions about gold’s future value. But as with any investment, there are no guarantees that things will follow as predicted.
Investors typically consider five factors when buying and selling gold. These include:
Supply and demand – is demand likely to increase, causing a spike in value? If so, now is the best time to buy, but waiting could pay off if you’re looking to sell.
Inflation – is inflation set to rise? Gold is a popular hedging tool to protect against inflation, so investors track this figure carefully.
Interest rates – historically, gold prices have dropped as interest rates have risen, so this is another relationship to consider when predicting future changes in value.
Currency rates – as touched on throughout this guide, currency rates are a major deciding factor when it comes to investing in gold. When predicting future price changes, investors typically look at the health of the US dollar, British pound sterling, and the Indian rupee.
Crises and world events – what is happening around the world that could the value of gold? From oil and gas prices to crises such as fuel shortages and pandemics, a huge range of external factors can influence the price of gold, so investors need to carefully assess the state of play before buying and selling.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.
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