What affects the price of gold? Key factors explained

Its value is determined by a complex interplay of supply constraints, monetary policy shifts, investor sentiment and real economic factors. In this guide, we’ll break down the main factors affecting gold price, explain why gold often outperforms during market downturns and offer insights for savvy investors.

Past performance isn’t a reliable indicator of future results

1. Finite supply and historical context

Gold is either forged in the aftermath of the big bang or by meteoric impacts on Earth, making its total supply strictly limited. This scarcity underpins gold price drivers over the long term. In 1833, an ounce of gold was worth just $20; today it trades near $1,800—an increase of almost 4,000 percent over fifty years alone.

2. Monetary policy and the nixon shock

A watershed moment for gold price inflation occurred on August 15, 1971, when the United States abandoned the gold standard and let the dollar float freely. Prior to that, from 1940 to 1970, gold’s price movements were muted. Once currencies could be printed without gold backing, gold’s finite nature caused its value to surge.

3. Inflation and gold as an inflation hedge

Inflation spikes—especially when exceeding 10 percent—drive investors toward gold as a protective asset. In early 2022, US inflation hit a 40-year high, prompting $14.8 billion of inflows into gold ETFs in six months. When inflation remains moderate (below 10 percent), gold price trends upward steadily. But runaway inflation sparks fear that central banks have lost control, pushing gold sharply higher.

4. Gold performance in bear markets

Gold’s reputation as a safe haven shines during equity bear markets. Since the 1970s, whenever the S&P 500 has dropped 20 percent or more, gold’s median return has been +7 percent. Its strongest gains occurred in the 1970s amid stagflation and oil shocks (+170 percent), while tighter monetary policy in the 1980s led to negative returns. Still, in five of the last six bear markets, gold has posted positive returns as low interest rates and stimulus diluted paper currencies.

5. Demand drivers: jewelry, ETFs and industrial use

Demand for gold breaks down roughly as 55 percent jewelry, 25 percent investment (bars, coins, ETFs) and the rest for technology and central banks. Lockdowns in 2020 sent jewelry demand down 39 percent, but a resurgence in India and China in 2021 drove a 67 percent jump. ETF flows move prices too: every 100 tons of monthly ETF buy/sell shifts gold prices by about 3 percent.

6. Real yields and gold price correlation

Real yields—nominal treasury yields minus inflation—have an inverse relationship with gold price. When real yields rise, investors demand higher returns from interest-bearing assets, reducing gold’s appeal. Conversely, when real yields fall, gold becomes more attractive. Yet in periods of intense market fear, even high real yields fail to deter gold buying.

7. Investment strategies for gold

• Diversify with ETFs: Low-cost gold ETFs offer liquidity and transparency, capturing spot price moves without storage hassles.
• Own physical gold: Bars and coins ensure offline ownership, but include storage and insurance costs.
• Consider timing: Monitor inflation trends and real yields—significant shifts often presage strong gold moves.
• Watch Central Bank activity: Major buyers or sellers by central banks can shift global supply-demand balance.

Conclusion

Gold’s price is driven by a blend of finite supply, monetary policy changes, inflation dynamics, bear-market flows, diverse demand sources and real interest-rate trends. Understanding these gold price drivers empowers you to time your entry and hedges effectively. Whether you seek preservation of wealth or upside in volatile markets, keeping a close eye on these factors will illuminate when gold shines brightest  — and on Capital.com, you can even profit from downward movements by going short on gold CFDs.