What Causes Fluctuation in Gold Prices?

Interest rates, supply and demand, and investor behavior commonly contribute to gold price fluctuations. Gold is often revered as a “safe haven” asset for investment and retirement portfolios, most notably in the form of a Gold IRA. Historically, gold has kept up with inflation and has served well during periods of high turmoil. In 2020, for example, gold outperformed the S&P 500.

Economic Uncertainty and Performance Indicators

Economic uncertainty, such as political uncertainty and/or instability, can increase gold prices; however, the price of gold tends to decrease when investors feel confident about the current state of the economy.

Also, economic data such as the jobs reports, wage and manufacturing statistics, and GDP growth influence gold prices because it informs the Federal Reserve’s monetary policy decisions.

Generally speaking, a stronger U.S. economy (low unemployment, plentiful jobs growth, manufacturing expansion, and GDP growth over 2%) can lower gold prices for fear that the Federal Reserve will tighten monetary policy and impact opportunity cost. On the other hand, a weaker economy—like the one we experienced during the Great Recession of 2008—can lower interest rates and increase gold prices.

From Our Expert: In practice, predicting the price of gold is complex, and there really isn’t a single answer as to why the price moves like it does. Ultimately, gold prices are a function of investor sentiment, the economy, and industrial demand. Within each of these, there are many factors to consider.

Ryan Sullivan, PE, Investment Advisor

Interest Rates

Gold often has an inverse relationship with interest rates, meaning that the price of gold usually decreases as interest rates rise and vice versa. This is because investors are more interested in bonds and more traditional investments when rates jump instead of gold, thus impacting its demand and subsequent price. (Bonds pay a yield, which is more attractive in these instances than gold, which does not.)

Sometimes, something as simple as concerns communicated by the Fed can spike gold investment interest because it implies rates could rise soon.

Gold Supply

As more consumers want to buy gold, either for jewelry and investment purposes, that supply is off the market for as long as the consumer owns it—which is usually for years.

Most of the easily accessible gold has been mined, so mining for what’s left is harder and more expensive. Plus, the rate at which companies mine gold has slowed. Simple supply and demand says that the less available gold available for purchase, the higher the price.

Studies by Claude B. Erb of the National Bureau of Economic Research and Campbell Harvey of Duke University Erb and Harvey explained how gold has a high price elasticity. That is, as gold demand increases, the price increases in line with said demand. 

These findings also suggest that there aren’t any true “hard and fast” rules to the price of gold. If investors start to pounce on gold, the price rises, no matter the shape of the economy or what the Fed’s current monetary policy might be.

Inflation

Investors often flock to gold during times of inflation. But it’s worth understanding the correlation between gold and inflation as you decide whether to add the asset to your portfolio. Inflation tends to rise during times of economic uncertainty. Many turn to gold to preserve wealth instead of stocks or bonds because it’s seen as a safe-haven asset during turmoil—it’s less likely than other currencies to decrease in value. Such demand affects supply, which usually results in higher prices.  

Still, rising inflation doesn’t always mean gold is a good bet. Case in point: the decline of gold throughout 2022 while inflation was rising at around 7%.

Central Banks

Central banks hold gold and paper money in reserve. When foreign exchange reserves are flush and the economy is healthy, central banks tend to reduce the amount of gold they store as investor interest wanes. This means that the price of gold falls. Because of this, banks try to maintain how much gold they put on the market. 

In the first three months of 2023, central banks added more tons of gold (228) to the global reserves since the institutions began tracking the rates of purchase in 2000. This comes as gold ETFs and gold bullion investments are at an all-time high.

Using Gold Price Fluctuations for Safer Investing

You can make a more informed decision about your investments by monitoring interest rates, economic performance, and global gold supply. Most retirement experts have recommended that you allocate 5% to 10% of your total portfolio to precious metals, but making finite suggestions can be challenging since investment preferences are highly personal. Consult with a financial advisor to see how you can leverage the benefits of gold in your portfolio.