Gold's lengthy history as a currency and store of value sets it apart from other precious metals. It's a safe-haven asset, meaning its value tends to increase during economic uncertainty when other asset classes face greater risks, and by extension, it’s commonly viewed as a hedge against inflation. However, just like any other asset, gold isn't immune to price fluctuations, and numerous factors can lead to this.

Keep reading to learn about how gold prices are determined, what can make them rise or fall and how you can make the best investment decisions if you're considering entering the gold market.

How are gold prices determined?

If you’re wondering what drives the price of gold, you’ve come to the right place. Prices for gold, like any other commodity, are in a state of constant fluctuation with trading taking place 24 hours a day in financial markets around the world. Gold is produced primarily by mining, but it also gets reclaimed through recycling efforts, typically from jewelry and coins but also electronics like TVs and cell phones. It also enters the market through central bank sales. The precious metal has many industrial, medical and fashion applications, but it also serves as a sound investment.

Combined, all of those factors create a flow of supply and demand which ultimately determines gold prices that are typically quoted as U.S. dollars per troy ounce. Trading activity between buyers and sellers — including producers, consumers, speculative traders, central banks and investors — all play a part in setting gold’s price.

Additionally, investor sentiment can significantly affect gold prices. Gold investors concerned about economic or political instability traditionally turn to gold as a safe haven and a hedge against inflation. During times of greater stability or economic growth, these investors may liquidate their gold purchases to pursue riskier investments with greater near- or medium-term potential upside. Typically, greater investment demand increases gold prices while sales of gold tend to see prices decrease.

Other factors that can influence gold prices include:

• Inflation: Periods of high inflation erode the purchasing power of paper currency, meaning people can buy less over time with their money. Gold retains its value better than paper currency because it isn't subjected to the same economic pressures, making it an attractive investment.

• Interest rates: When interest rates are low, the opportunity cost of gold — the potential benefit from choosing one investment over an alternative — is lower. This typically increases demand and drives up the price of gold. Conversely, when interest rates are high, the opportunity cost of holding gold is higher, making other investments more appealing. Historically, this decreases demand and drives down the price of gold.

• Currency exchange rates: Changes in currency exchange rates can also impact the price of gold. A stronger dollar can make gold more expensive for foreign buyers and lessen global demand. Contarily, when the dollar underperforms against currencies like the euro or yen, foreign buyers can purchase more gold with their stronger currency, decreasing supply and boosting demand.

The effects from these forces aren't mutually exclusive and often depend on other factors exerting influence on the market. However, they are certainly the strongest and most apparent during relative economic stability.

When will gold prices go down?

It's difficult to predict when gold prices will fluctuate. You could view changing investor demand as an indicator of rising or falling prices, but this is a rear-facing measure that’s more reactionary to market performance or global political instability.

As the global economy continues its recovery from the COVID-19 pandemic, central banks have adjusted monetary policies (e.g., monetary easing) to stimulate economic growth. This led to a period of lower interest rates, which helped gold prices. However, central banks were forced to pivot in the face of decades-high inflation and change monetary policy accordingly (e.g., monetary tightening). These policies resulted in higher interest rates and a subsequent decrease in gold demand. Global inflation will likely continue to fall over the next several years, which could reduce gold's price and its necessity as a hedge.

It's impossible to predict with certainty when gold prices will decrease. That said, you should monitor market forces and economic indicators while being aware of significant international news, all of which can impact the precious metal’s price.

Factors that cause the price of gold to fluctuate

It's true that gold retains its value well and tends to experience less volatility than other commodities. Nonetheless, its price still varies on a daily basis. In addition to those previously mentioned, there are several other factors that affect gold prices.

Changes in supply and demand of gold

Gold's prices are highly impacted by how quickly it's mined or repurposed. The pandemic disrupted production, decreasing the regular supply of gold and other precious metals, which sent gold to its all-time high price in 2020. Operations have since returned to more normal levels and the supply of gold has increased, which subsequently reduced gold prices in the short term. However, after bottoming in 2022, due to various other factors, the price of gold in 2023 returned to near its all-time high.

Market volatility

Gold prices reflect current market performance, the global political climate and many other factors. Fluctuations in financial markets can also cause volatility in the price of gold. However, because so many investors purchase gold as a safe-haven asset, its value remains relatively constant. Long-term investments in the precious metal are unlikely to experience losses.

Aggressive interest rate hikes or drops

Interest rates significantly impact the price of gold. When interest rates rise, the opportunity cost of holding gold increases, meaning investors could be missing out on higher returns in other assets if they keep their gold investments. As a result, prices fall as investors shift their capital. Conversely, when interest rates drop, the opportunity cost of holding gold decreases, making it a more attractive investment and driving up its price.

Inflation and currency devaluation

Investors use gold as a hedge against inflation and currency devaluation. When inflation or the risk of currency devaluation is high, investors may turn to gold as a safe haven, driving up its price. When inflation is low, currency retains its value and demand for gold may decrease, which causes its price to fall.

Geopolitical events

Political and economic instability, geopolitical tensions and major global events have always impacted the price of gold. Any event which creates uncertainty and volatility in financial markets might cause investors to turn to gold as a safe haven, which can drive up its price.

It's worth noting that you can spot international conflict by tracing historic gold prices, with the value of gold consistently increasing as investors turn to it for protection from an uncertain market. For example, when Russia invaded Ukraine in the first quarter of 2022, gold prices increased by 6%.

Gold price forecasts for the next 3 years

Gold price forecasts vary widely, reflecting an uncertainty in the factors analysts believe will drive the market. Some key factors analysts watch include the pace of interest rate hikes by the Federal Reserve and other central banks, potential interest rate reductions when inflation subsides, the performance of the U.S. dollar against foreign currencies, the global economic outlook, the risk of geopolitical conflict and investor sentiment.

Based on these complex factors, some analysts believe gold prices could reach as high as $2,500 per troy ounce by the end of 2023, which would far exceed its previous all-time high set in 2020. Other analysts are more cautious, predicting that gold prices will remain relatively flat or fall in the next few years.

Ultimately, the future price of gold is impossible to predict. If you're considering investing in gold, a deeper understanding of the factors that drive the gold market can help you make more informed decisions about whether or not to invest, and when to do so.

Why is gold considered a safe-haven asset?

Gold has a finite supply, making it relatively stable in terms of value. It is universally accepted and recognized, making it easy to convert into most currencies. Similarly, gold's value tends to rise with inflation, making it the perfect hedge. Governments and central banks also maintain strategic gold reserves. Still, since abandoning the gold standard, the precious metal isn't tied to any particular country or government, and its value isn't as volatile as other assets that depend on the global economy's health.

What's the right amount of gold to invest in?

When considering investments, it's always important to analyze your budget, risk tolerance and goals. You should determine your reasons for investing in gold, your intended outcome and how much of your portfolio you wish to allocate.

For longer-term investments, a gold IRA may be an attractive option. Like traditional IRAs, gold IRAs provide tax advantages for funds set aside and held in trust for retirement. Because these IRAs exist as gold investments, they offer greater security from financial crises or economic recessions.

If you're interested in this kind of investing, consider looking into the best gold IRA companies to learn more about your options.

For individual investors, there is no right or wrong amount of gold in which to invest. However, it’s recommended that you don’t over-allocate, with advisors suggesting no more than 10% of your overall portfolio dedicated to precious metals. Exceeding that level could limit the benefits of well-diversified holdings.

Different ways to get exposure to gold

Those looking into how to buy gold might find themselves overwhelmed by all the options. There are various ways to begin investing in gold, and which method you choose depends on factors such as how much you wish to invest and your long-term goals. Each approach has advantages and disadvantages, so it's good to be familiar with them to make a more informed decision.

Gold stocks

One way to invest in gold is by buying stocks in companies that mine or are otherwise involved in the production of gold. These stocks are typically more volatile than the price of physical gold as they are subject to greater market forces, but they can provide investors with easy access to the gold market.

Additionally, gold stocks can be alluring to income investors as many pay dividends. For example, the two largest gold-mining companies in the world — Barrick Gold Corporation and Newmont Corporation — pay dividends with significant, market-beating yields.

Gold exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) offer another way of investing in gold. A gold ETF is a type of fund leveraged to the price of gold or the companies affiliated with its mining and production. These funds are publicly traded on stock exchanges and offer an easy way to invest in gold without the complication and regulatory issues of buying physical gold. Like other ETFs, gold ETFs pool investors’ funds. Those funds are used for holding physical gold, the stock of companies leveraged to gold or both.

Physical gold

Anyone can purchase gold bullion in the form of coins, rounds, bars or ingots. This method is attractive to some investors as it provides tangible assets. However, if you don’t plan on possessing the gold, you’ll have to pay ongoing fees for insurance, storage and maintenance.

Bullion is generally valued at current gold market prices, while gold coin prices may vary. Ingots or bars of bullion are priced per ounce, but as with jewelry or any worked gold, prices per gram may be more common when investing in coins and may be slightly higher than spot prices for the precious metal.

Gold futures

Gold futures are contracts that allow investors to buy or sell a specific amount of gold at a particular price and date in the future. Though trading futures can potentially produce significant returns, it is a highly complex strategy that entails elevated risk. Because of this, trading gold futures is typically reserved for seasoned or professional investors.

Key takeaways

Gold prices are determined by various factors, but they are primarily driven by supply and demand. People purchase gold for multiple reasons, with investment being the leading motivation. Subsequently, investor sentiment is one of the main factors affecting gold prices.

During times of economic or political instability, investors turn to gold as a way to protect otherwise vulnerable capital. This increase in demand drives up the precious metal’s price. Conversely, during economic stability or growth, investors might liquidate gold holdings to take advantage of more lucrative opportunities, which leads to a decrease in demand and a drop in the price.

Other factors influencing gold prices include inflation, monetary policy and interest rates, currency exchange rates, changes in supply and demand, market volatility and geopolitical events. While the timing of gold price fluctuations is difficult to predict, monitoring market forces and economic indicators can provide insight.