Factors Affecting Gold Prices

Many factors with complex dynamics play a role in determining gold prices. Some of these factors have more long-term effects, while others have short-term effects (creating a pump or dump effect). 

Supply and Demand 

Gold is one of the most common investment instruments with limited supply and abundant demand. In addition to being a precious metal, it is also widely used in the manufacturing sector, for example as an electrical conductor or as a material in life support devices. Investors can invest in gold in different ways. For example, physical gold, such as gold bars, coins or jewelry. Of course, it is also possible to invest in gold by participating in gold funds.

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An increase in demand for gold usually results in an increase in the price of this precious yellow metal. In the past decade, the economic growth of China and India has increased the demand for gold and thus the price of gold has also increased. Recently, this huge demand has softened somewhat in line with the countries' stable economic growth.

Exchange Rate

It is important to know that the precious yellow metal is a dollar-indexed instrument although gold is a borderless asset that is globally recognised and valued (beyond national currencies and economic conditions). Dollar-denominated assets typically have an inverse relationship with the value of the US dollar; if the value of the dollar falls, the value of gold increases.

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Investors can buy less gold per dollar due to decreased purchasing power, which naturally increases the value of gold when the value of the dollar declines. In other words, as the value of the dollar is lower, more dollars are needed to buy the same ounce of gold. Historically, during periods of high inflation, gold remains stable or appreciates and proves to be a safe haven for investors. In 2024, the all-time high price of gold was renewed many times in a short period of time with the decline in the purchasing power of the US dollar. 

Central Bank Policies

According to Reuters, global central banks such as the US, UK and European central banks hold about a fifth of all gold mined throughout history in their reserves. In recent years, the central banks of Russia, China, Turkey and India have also started buying large quantities of gold.

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Gold is an important asset that is known to hold its value for central banks. When other assets fall, the price of gold holds its value or rises, helping to offset losses in other reserves. But what gold cannot do is provide a return. Unlike a bond, gold does not guarantee interest. Therefore, when the economy picks up, central banks may sell some of the gold in their reserves, causing its price to fall.

Geopolitical Situations

Geopolitical situations can have a positive impact on the rise of gold. As gold is seen as a safe haven in any region, investors may turn to gold in times of concern in order to protect their assets from the possible consequences of risks. Thus, the value of gold may also increase in times of increased geopolitical tensions, as is the case today.

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This is exactly what happened in the first quarter of 2022, when the Russia-Ukraine conflict helped gold appreciate by 6%. We also saw gold appreciate when the current conflict between Hamas and Israel erupted in Q3 2023. The day before the Hamas attack, the price of gold was $1,834.60 an ounce. On 27 October 2023, 20 days after the attack, the price of the precious metal rose 8.78% to $1,995.80.

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When it comes to gold and geopolitical tensions, the old saying ‘buy the rumor, sell the news’ can also apply. Investors tend to buy gold before a crisis emerges and sell it afterwards to make a profit. However, rumors do not always come true.

Inflation

Gold has a close relationship with inflation; when inflation increases and prices rise, the value of gold also tends to rise. Investors often turn to gold as a way to protect the value of their portfolios during inflationary periods. But why does inflation increase the price of gold?

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Fiat currencies lose value when high inflation occurs. Seemingly small changes, over time, adversely affect the ability to trade in fiat money. Just think about the difference between food prices in your childhood and today's food prices; can you buy as much stuff with today's 100 paper currency as you could back then? 

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Exchange Rates and Gold Prices

The Link Between Dollar Strength and Gold Prices

All other things being equal, a stronger US dollar tends to keep the gold price lower and more in check. A weaker US dollar, on the other hand, can push the gold price higher through increased demand. As a result, gold is often seen as a good hedge against inflation. Times of inflation are times when gold prices rise as the value of fiat currencies falls. 

Exchange Rate Fluctuations and the Gold Market

The value of the dollar can be seen in the recent price movement of gold. In 2022, the price of gold actually fell for much of the year, partly due to the strength of the dollar against other currencies as inflation increased. After reaching a low of less than $1,630 per ounce in September and October 2022, the price of gold began to recover, with inflation continuing and concerns about the recession.

Central Banks and Gold Reserves

Gold Reserve Policies of Central Banks

Central banks hold paper currencies and gold. Most of the world's countries have reserves consisting primarily of gold. As central banks diversify their currency reserves, the price of gold tends to rise.  

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According to Bloomberg, we are experiencing the most gold purchases since the United States abandoned the gold standard in 1971. In 2020, the central bank's gold purchases slowed down, but then accelerated again in 2021. In 2022, it managed to surpass the 50-year record. 

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*The largest gold buyer in 2022 was the Central Bank of Turkey, followed by Uzbekistan, India and Qatar.

Effect of Changes in Gold Reserves on Prices

Changes in gold reserves by central banks may have direct or indirect effects on gold prices. Gold occupies an important place in the global financial system both as a reserve asset and as a safe haven. Therefore, gold purchases and sales by central banks are closely monitored by the markets and can lead to significant fluctuations in prices.

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Gold purchases by central banks often increase the demand for gold, which can cause prices to rise. When a central bank buys large quantities of gold, this move indicates that gold is perceived in the market as a valuable reserve asset and increases investor confidence. Central banks, especially in developing countries, try to increase their gold purchases in order to diversify their foreign exchange reserves and maintain the value of their currencies. This increases the demand for gold and contributes to an upward movement in prices.

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Reducing gold reserves, on the other hand, usually puts pressure on prices. If a central bank starts selling gold, the supply in the market increases, which may lead to a fall in prices. However, gold sales by central banks are usually planned and try to be carried out without an immediate impact on the market, so that the negative effects on prices can be limited. Nevertheless, gold sales by major central banks can lead to panic in the market and cause prices to fall rapidly.

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Changes in central banks' gold reserves are also related to global economic policies and geopolitical developments. For example, during periods of heightened economic uncertainty, central banks may increase their gold reserves, which may trigger demand for gold among investors and push up prices. Similarly, maintaining and increasing gold reserves during global crises or major economic transformations reinforces the role of gold as a safe haven.

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The Relationship Between Gold and Financial Markets

Stock Markets and Gold Prices

There is an inverse relationship between equity markets and gold prices. The dynamics of this relationship varies depending on the risk appetite of investors and the uncertainty in the markets.

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• Bull Market: Investors generally favor riskier assets and demand for gold decreases when stocks rise. In this case, gold prices begin to decline.
• Bear Market: Investors turn to gold as a safe haven and gold prices are likely to rise when stocks fall in value. Especially during economic crises or major market crashes, gold demand increases significantly.
• Crisis Periods: During major events such as the 2008 Global Financial Crisis or the COVID-19 pandemic, investors shunned risky assets and turned to gold, and gold prices experienced significant increases.

The Relationship Between Bond Rates and Gold

The relationship between gold and bond yields is inversely proportional, as in equity markets. The reason is that gold is a non-interest bearing asset. Gold does not provide a regular return to its investors.

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• When Interest Rates Fall: During periods of low interest rates, bonds and other interest-bearing investments become less attractive. This leads investors to turn to gold, which has no interest income, and gold prices may increase.
• When Interest Rates Rise: When bond interest rates rise, demand for gold may decrease because bonds become more attractive. When the attractiveness of interest-bearing assets increases, the price of gold may come under pressure.
• Inflation and Real Interest Rates: Real interest rates (inflation-adjusted interest rates) also affect the price of gold. Low or negative real interest rates increase the attractiveness of gold because gold is seen as a hedge against inflation.

The Link between Gold and Other Commodities (Silver, Oil, …)

There is no obvious connection between gold and other commodities such as silver and oil. Each has a different impact on the markets. However, there is a positive correlation between gold and silver since both metals are considered by investors to be low-risk stores of value; when gold prices rise, silver prices generally tend to rise as well. However, silver is more volatile than gold due to its large industrial use. 

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There is a more indirect relationship between oil and gold. An increase in oil prices may increase inflationary pressures and increase the demand for gold, because, as we have repeatedly stated throughout this article, gold provides protection against inflation. However, if oil prices rise too much, it may negatively affect economic growth and indirectly reduce the demand for gold. In general, although fluctuations in commodity markets can affect each other, the supply-demand dynamics and uses of each are different. So, it is difficult to say that the links are always direct or strong.

Gold Investment and Investor Behaviour

Whether used as a hedge against inflation, as a diversification tool or as an element that calms nerves during market fluctuations, gold has proven itself time and time again as an investment. For investors, this timeless precious metal continues to be a ready reassurance for those who feel as if things could go bad at any moment.

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For those who want to keep their portfolio in balance, gold is the perfect help. Gold follows an independent path while stocks, funds and bonds usually move together. Investor’s return is stabilized when stocks go down thanks to this independence. When the markets are doing well, it may sometimes seem like gold has faded into the background, but when the going gets tough, it is obvious that gold is quickly declared a hero.

The Future of Gold Prices: Expert Opinions and Forecasts

Experts have different views on the future of gold prices amid today's economic uncertainties and global developments. Although the course of gold prices depends on economic and political factors, most experts agree that gold will continue to gain value in the long term.

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Goldman Sachs analysts predict that gold prices may rise in 2024 and beyond. The expectation of an increase is especially strengthened if interest rates in the US fall and global inflationary pressures continue. It is thought that gold prices could rise up to $ 2,500. Bank of America analysts state that the monetary policies of global central banks have a major impact on gold prices. In particular, the US Federal Reserve's (FED) interest rate cut policies can direct investors to gold.

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The World Gold Council argues that the value of gold will steadily increase in the long term. Demand for gold is expected to increase due to increasing geopolitical risks and uncertainties in financial markets. According to UBS strategists, gold prices will continue to rise until 2025 and if global economic uncertainties increase in this way, it will reach $ 3,000 in a short time. 

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