What drives the gold price?

News Arnulf Hinkel, financial journalist – 04.05.2018

One of the various features of gold is its dual role both as a rare commodity and as a financial instrument. As a result, demand, and thus the price of the precious metal, moves pro- as well as counter-cyclically. The most important drivers of gold performance can be grouped into four main categories.

Long-term drivers of the gold price

National wealth and economic expansion of a country or region play a primary role here. They have a favourable effect on gold demand as a long-term investment, for jewellery and in technology during periods of growth. In addition, central bank demand has a more long-term impact on gold performance.

Counter-cyclical: short- and medium-term drivers

In the short run, market risks and geopolitical uncertainties play a most important role, as gold demand is heavily influenced by its safe haven appeal. Demand can be further boosted or dampened by other factors. On the one hand, there are price trends and significant capital flows either for tactical reasons, e.g. derivatives positioning due to in- or outflows on the forward markets, or simply due to the respective phase in the economic cycle. On the other hand, opportunity costs influence demand for gold as an investment. How do major currencies, such as and above all the US dollar, perform? In which direction will real interest rates move? They have a major influence on the performance of financial instruments such as government bonds, which are competing assets in the eyes of investors. And finally, given all the advantages gold has to offer, it should not be forgotten that the precious metal yields neither interest nor does it produce any dividend payments.

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