Gold does not respond to one thing. It sits at the intersection of interest rates, currency movements, central bank activity and general uncertainty, and at any given moment one of those usually dominates while the others push in different directions.
Understanding the drivers is not the same as predicting the price, and nothing here should be read as a forecast. But knowing what the market reacts to makes the moves considerably less mysterious.
Real interest rates
This is the driver most professionals watch first.
Gold pays no interest. Holding it means forgoing whatever a comparable safe asset would have paid. When real interest rates, meaning nominal rates minus inflation, are high, that opportunity cost is significant. When real rates are low or negative, the cost of holding a non yielding asset largely disappears.
This is why gold often reacts sharply to central bank announcements and to inflation data. Both change the real rate calculation.
The US dollar
Gold is priced internationally in US dollars, which creates a mechanical relationship. When the dollar strengthens against other currencies, gold becomes more expensive for buyers using those currencies, which tends to weigh on demand. A weaker dollar has the opposite effect.
For New Zealand buyers this matters twice over. The US dollar gold price moves, and the NZD/USD rate moves, and the local price reflects both. A rising US dollar gold price can be partly offset by a strengthening New Zealand dollar, or amplified by a weakening one.
Central bank buying
Central banks are significant holders and, in recent years, significant buyers. Their purchases represent real physical demand at scale, and because they generally buy for long term reserve reasons rather than to trade, that metal tends to leave the available market.
Our article on why central banks buy gold covers the reasoning.
Uncertainty and risk
Gold tends to attract demand during periods of geopolitical tension, financial stress or general uncertainty. The pattern is well established, though the size and duration of any move varies enormously and is not predictable from the event itself.
Worth noting that markets often react to anticipation rather than to events, and that a widely expected development may already be reflected in the price before it happens.
Supply, and why it matters less than you would think
Here gold differs from almost every other commodity.
Gold is not consumed. Almost all the gold ever mined still exists in accessible form, held in vaults, jewellery and reserves. Annual mine production adds only a small percentage to that existing stock.
The consequence is that above ground supply dwarfs new production, so a mine opening or closing has far less price impact than it would for a commodity that gets used up. What moves gold is changes in demand to hold the existing stock, not changes in how much comes out of the ground.
Silver is different in exactly this respect, since much of it is consumed industrially. Our article on what silver is used for covers that.
Why the drivers conflict
These forces frequently point in opposite directions at once, which is why gold sometimes fails to move as expected.
A geopolitical crisis might support gold while simultaneously strengthening the US dollar, which works against it. Strong economic data might reduce safe haven demand while also raising rate expectations. Two drivers, opposite effects, and the net result depends on which the market weights more heavily that day.
This is the honest reason single factor explanations of gold's price rarely hold up.
Frequently asked questions
What makes the gold price go up?
Commonly falling real interest rates, a weakening US dollar, central bank buying and rising uncertainty. These often conflict, so no single factor reliably determines direction.
Why does gold fall when interest rates rise?
Gold pays no interest, so higher yields elsewhere increase the opportunity cost of holding it.
How does the exchange rate affect gold in New Zealand?
Gold is priced in US dollars, so the local price reflects both the US dollar price and the NZD/USD rate. Both move independently.
Does mine production affect the gold price much?
Less than for most commodities. Gold is not consumed, so existing above ground stock vastly exceeds annual production.
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This article explains factors that influence the gold price and is general information, not financial advice or a forecast.