What Moves Gold Prices?

By Jesse Emspak   Updated March 14, 2021 Reviewed By Michael J Boyle Fact Checked By Amanda Jackson

The price of gold is moved by a combination of supply, demand, and investor behavior. That seems simple enough, yet the way those factors work together is sometimes counterintuitive. For instance, many investors think of gold as an inflation hedge. That has some common-sense plausibility, as paper money loses value as more is printed, while the supply of gold is relatively constant. As it happens, gold mining doesn't add much to supply from year to year. So, what is the true mover of gold prices? 

KEY TAKEAWAYS

Supply, demand, and investor behavior are key drivers of gold prices.

Gold is often used to hedge inflation because, unlike paper money, its supply doesn't change much year to year.

Studies show that gold prices have positive price elasticity, meaning the value increases along with demand.1

However, the investment growth rate of gold over the past 2,000 years has not been meaningful, even as demand has outpaced supply.

Since gold often moves higher when economic conditions worsen, it is viewed as an efficient tool for diversifying a portfolio.

Factors Affecting Gold Prices  

Correlation to Inflation

Economists Claude B. Erb, of the National Bureau of Economic Research, and Campbell Harvey, a professor at Duke University's Fuqua School of Business, have studied the price of gold in relation to several factors. It turns out that gold doesn't correlate well to inflation. That is, when inflation rises, it doesn't mean that gold is necessarily a good bet.2

So, if inflation isn't driving the price, is fear? Certainly, during times of economic crisis, investors flock to gold. When the Great Recession hit, for example, gold prices rose. But gold was already rising until the beginning of 2008, nearing $1,000 an ounce before falling under $800 and then bouncing back and rising as the stock market bottomed out. That said, gold prices rose further, even as the economy recovered. The price of gold peaked in 2011 at $1,895 and has seen ups and downs since that time. In early 2020, prices fetched $1,575.3

In their paper titled The Golden Dilemma, Erb and Harvey note that gold has positive price elasticity. That essentially means that, as more people buy gold, the price goes up, in line with demand. It also means there aren't any underlying "fundamentals" to the price of gold.1 If investors start flocking to gold, the price rises no matter what shape the economy is or what monetary policy might be.

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