What Determines the Price of Gold?

Posted - October 31, 2023
what determines the price of gold

Figuring out how the gold market works is one of the best things you can do for your collection. Investors who are able to predict market trends tend to make more educated decisions about the gold products they purchase. 

When the price of gold takes a nosedive, the savvy investor is prepared to read the signs and buy the dip. And when prices balloon to unsustainable levels, the investing pros sell while everyone else tries to hold on for more profit. 

But developing this sixth sense for the gold market’s volatile price movements can be tough. For some collectors, it takes decades of experience to really understand how the gold market works. 

So what determines the price of gold? As you continue to hone your skills and build your gold stack, Hero Bullion is here to help. In today’s Bullion Academy guide, we’ll walk you through everything you need to know about the factors that help determine gold’s spot price. 

Why is Gold Expensive? 

We’ll start with the basics. Why is gold so expensive right now? Gold’s price tends to have an inverse relationship with traditional metrics for global economic performance. In simpler terms, gold does well during periods of economic uncertainty. 

When the United States Dollar loses strength or global crisis seems possible, investors turn to gold. Why? It’s because gold is considered a safe-haven asset. Safe-haven assets are likely to continue to perform well, even when the rest of the economy circles the drain. Gold has long been called a non-correlated asset by economists. This is just a fancy way to say that the value of gold doesn’t depend directly on other economic indicators, like the stock or housing market. 

There are 3 main reasons gold is so expensive right now: scarcity, intrinsic value, and economic uncertainty. To understand why gold is so expensive, we’ll have to take a look at the main question of today’s guide: what determines the price of gold? 

2023 1 oz Mexican Gold Libertad Coin Obverse
1 oz 2023 Gold Libertad

Gold’s Scarcity 

Gold is an incredibly rare element. You probably already know this; gold has always been known as one of the most valuable metals on Earth. If gold wasn’t valuable, there would have been no reason for hundreds of thousands of people to migrate into the wilderness during the California Gold Rush. What determines the price of gold during periods where demand is low? Rarity helps determine how expensive gold is. 

Just how rare is gold? According to some researchers, gold is so rare that it makes up only .0013 parts per million of the Earth. No wonder gold is expensive! Still, there are quite a few rare substances hidden beneath the surface of our planet. What makes gold so special? 

Intrinsic Value Defined

What determines the price of gold? Because of both its rarity and useful applications, gold has intrinsic value. Intrinsic value refers to the value something holds naturally, even without considering its industrial uses. Some things have little intrinsic value. Dirt, for example, will never be expensive. Gold is a different story. Because gold is beautiful, rare, and useful for making coins, bars, and jewelry, it always has intrinsic value. 

This is why you’re likely never going to see gold become nearly worthless. Sometimes, gold’s value may fall considerably. We’ll take another look at these unique situations when we discuss what determines the price of gold. For now, it’s important for gold collectors to remember that their favorite precious metal has intrinsic value. 

Economic Uncertainty

Gold is expensive right now for a few different reasons. For the most part, economists believe that gold has skyrocketed in value because of global economic uncertainty. Economic uncertainty refers to popular fears that the global economy is following a negative trend. Global conflicts between multiple world powers, an explosive inflation problem in the United States, and countless other indicators have led to a high degree of economic uncertainty. 

When we discuss what determines the price of gold, it’s impossible to understate the importance of global economic conditions. Gold is a safe-haven asset, so investors tend to buy more of the precious metal when they’re afraid that things aren’t going well in the traditional economy. 

To illustrate this point, let’s look at an example. 

Imagine that you’re somebody who has very little faith in the global economy. You feel that the United States Dollar might crash in value, and that global conflicts may make it harder for companies to do business. Knowing this, would you put your money on traditional stocks? Most investors would instead look for investments that would survive this economic crash. Enter: gold bullion. 

For decades, both green and seasoned investors have turned to gold as a ‘safe-haven’ for their money when times are rough. 

Factors that Influence Gold’s Value 

We’ve already started our discussion of what determines the price of gold. However, we realize that investing in gold is a serious decision. Especially as gold prices continue to climb, buying gold bars and coins can be a very costly investment. 

To keep our investors better informed, let’s take a look at some of the factors that influence the value of gold. We find that there are 3 main elements behind gold’s price trends: supply and demand dynamics, global economic conditions, and industrial demand. 

Supply and Demand Dynamics 

Supply and demand dynamics are part of what determines the price of gold. This isn’t unique to gold, either. In almost any industry, price action is a battle between supply and demand. 

When global catastrophe or economic anxiety drives investors to gold, demand spikes while supply remains the same. Likewise, disruptions to major gold mining operations may lead to a decrease in supply. In both situations, this leads to a higher price per ounce of gold. 

It can be difficult to track supply and demand for gold. We’ll include a couple tips to help you improve your gold stacking game at the bottom of this guide. The important thing to remember is that gold, like all investments, depends on supply and demand to help determine its price. 

50 South Dakota Goldback Aurum Gold Note Stacked
50 South Dakota Goldback Gold Note

Global Economic Conditions

Another major aspect of what determines the price of gold is global economic conditions. We spent a decent amount of time talking about this earlier in our guide, so we won’t say too much here. 

When times are bad for the general economy, prices for gold usually spike. Some investors seem to think that, because gold is a safe-haven asset, its price isn’t influenced by the larger economic conditions in the world. This couldn’t be further from the truth. In reality, gold’s price is often negatively correlated with economic confidence. In other words, gold benefits when the rest of the economy struggles. 

Gold and Inflation 

It might be worth spending just a bit more time discussing the relationship between gold and inflation. Inflation of fiat currencies is one big part of what determines the price of gold. As all of our readers know, the United States has a pretty big inflation problem right now. Inflation means that fiat currencies, the paper currencies you use for most transactions, are becoming less valuable. 

During times of extreme inflation, investors turn to a tried and true investment known to hold its value: gold. While the price of gold probably won’t hit the moon as the purchasing power of the United States Dollar continues to decline, we do note inflation as part of what determines the price of gold. 

Interest Rates and Gold

Did you think you’d be getting an economics lesson in this article about what determines the price of gold? One factor behind rising gold prices might seem unexpected to new investors, but we promise it’ll make sense in just a few sentences. 

Gold has a negative correlation with interest rates. We mentioned negative correlations a bit earlier, but your writer needs reminders as much as you do. A negative correlation means that the value of one investment goes up when another goes down – and vice versa. 

When interest rates decrease, the value of gold tends to go up. This isn’t always the case, and it’s difficult to predict just how much gold’s price will move when the Federal Reserve decides to hike interest rates. Still, you should understand – and watch – interest rates if you plan on trading gold as part of your investment portfolio. 

Industrial Demand 

Gold doesn’t quite have the industrial demand associated with lesser metals like copper. Who could compete with copper, anyway? We don’t see gold bullion used to create medical supplies, roads, and plumbing systems. But that doesn’t mean gold is without its essential industrial applications. 

In fact, industrial demand is an essential aspect of what determines the price of gold. Did you know that gold is used in the electronics industry because of its excellent conductivity? You’re not alone – we didn’t either before we sat down to write this guide! 

Industrial applications in the technology sector are what determines the price of gold, at least where the precious metal’s intrinsic value is concerned. 

How to Invest in Gold the Right Way

You’ve learned more about what determines the price of gold, but your journey to being a gold expert isn’t over yet. As promised, we’ll end this guide with a few tips new investors can use to better understand gold price trends. If you do your research and buy the right gold products, you can significantly increase the value of your gold stack. 

How do you invest in gold the right way? There are 3 main things every investor should do before buying their first gold coin or bar: track spot price trends, minimize premium costs, and search for reputable dealers. 

Tracking Spot Price Trends 

What determines the price of gold? Once you have the answer to this question, you should be able to make sense of gold price charts. The best gold collectors don’t just know when the market is making a move – they know the reasons behind the price action. 

We’d never want to recommend that our readers obsess over gold price charts. Spending hours every day refreshing our gold charts page isn’t a good (or productive) way to spend your time. But once you understand what determines the price of gold, you should be able to make valuable judgments about which price trends are momentary shifts – and which ones are here to stay.

Minimizing Premium Costs

We’ve focused mainly on what determines the price of gold in this article. But when it comes to gold coins, bars, and other processed bullion products, there’s a different equation at play. 

Gold products are never sold at spot price. Instead, they’re usually offered at spot price plus a small additional fee, which we refer to as a premium. For seasoned investors, premiums can be a dirty word. Nobody wants to pay more money and receive less gold! 

But premiums are an unavoidable part of buying gold. To really maximize your profits once you understand what determines the price of gold, you’ll need to look for gold products with the lowest possible premiums. 

RCM 1 oz Gold Bar
Royal Canadian Mint 1 oz Gold Bar

Gold Products with the Lowest Premiums 

Gold bars almost always have the edge when it comes to investments with minimal premium fees. Gold bars don’t usually include the beautiful, ornate designs that decorate popular gold coins. 

What determines the price of gold bars? Gold bars are often sold close to spot price. You’ll still pay a premium on almost any gold bar you buy, but you won’t have to worry about the crazy markups associated with some popular gold coins. 

Finding Trustworthy Dealers

When you start building your gold stack with quality bars and coins, there’s nothing more important than finding reputable dealers you can trust. 

Hero Bullion isn’t the only option out there, and we encourage you to shop around and find a dealer who works for you. Our competitive prices, discreet and secure shipping procedures, and helpful customer service team are here to support you with all of your gold collecting needs. 

Final Thoughts: What Determines the Price of Gold?

What determines the price of gold? We get this question a lot, and we most definitely understand why. Gold’s price trends are often a mystery, especially to new stackers trying their hand at one of the most fulfilling investment categories. 

In short, gold’s price is determined by a number of factors, including supply and demand, global economic conditions, and industrial applications. 

Still confused? Reach out to our customer service team, and we’ll get you on your way to stacking gold with confidence. 

You might also be interested in: 

About The Author

Michael Roets is a writer and journalist for Hero Bullion. His work explores precious metals news, guides, and commentary.