As of January 2023, gold has the highest market cap of any asset globally, weighing in at $12.342 trillion. Its prices fluctuate usually in a way that is complementary to other assets, like stocks and bonds. When non-gold assets are up, the price of gold usually goes down. When non-gold assets are down, the price of gold usually goes up. 

But why? 

Here we’ll unveil the mysteries behind gold price fluctuations to help you pinpoint your best market entry opportunity. 

Meet the primary influencers — no, not like the ones on TikTok and Instagram — the ones that are pivotal in determining gold price fluctuations: supply and demand. Much like our social media content creators and the brands they promote, these factors influence investor behavior, which in turn affects gold prices. 

In their research, titled “The Golden Dilemma,” esteemed economists, Claude B. Erb and Campbell Harvey, found that gold has a positive price elasticity. This means that as the demand for gold goes up, more people invest in gold assets. This in turn causes gold prices to rise. 

Gold is a finite resource. The majority of gold contained within the earth’s crust has been mined or soon will be. The supply of gold is more or less static and mining production hasn’t significantly changed since 2016. Like other commodities, if demand for gold exceeds the readily available supply, prices can be expected to increase. Conversely, if there is a market surplus of gold, prices should fall to maintain equilibrium. 

Let’s explore further conditions that can influence the influencers. 

Once upon a time, before the fiat system, the U.S. dollar, the flagship currency of today’s global market economy, was backed by the gold standard. Today, the value of the U.S. dollar is backed by a government guarantee that it carries a certain lasting intrinsic value. As a resilient currency that has been around for thousands of years, central banks — especially in China, the U.S., Germany, India, Japan, Russia, and a few more EU member states — hold tens of thousands of tons in gold reserves.

When these central banks strategically shift away from paper currencies and into gold, the price of gold usually increases. Alternatively, sizable foreign exchange reserves combined with a well-oiled economy, incentivize central banks to release their gold reserves. This causes the price of gold to fall. 

U.S. Federal Reserve Monetary policy also influences gold prices. When interest rates are set low, investors may favor gold more than other assets. This is because gold’s investment properties — diversification, its consistent store of value, and its ability to act as a hedge against inflation — are more valuable than the nominal gains that could be made through other interest-based assets. Alternatively, as lending rates rise, investors are more likely to forgo gold investments in favor of other assets like stocks, bonds, and CDs that will yield a higher return on investment.  

Inflation — the rising cost in the price of goods and services — has swept the nation for the past two years. Usually, with rising inflation, the price of gold will also rise. During periods of deflation, gold’s price usually gets weighed down by market conditions. The Federal Reserve’s role is to set interest rates that keep a balance between periods of inflation and deflation. As a result, the ongoing tug-of-war between interest rates and inflation can create fluctuations in gold prices. 

Furthermore, gold’s price has an inverse correlation to the U.S. dollar. When the U.S. dollar is stronger during periods of deflation, the price of gold shifts into a more controlled low gear. However, a weakened U.S. dollar during periods of inflation is likely to drive the price of gold higher due to increasing demand. This is because, somewhat counterintuitively, more gold can be purchased when the dollar is weaker.

Lastly, uncertainty around global political and economic events can influence gold prices. For instance, 2022 witnessed the beginning of the Russian-Ukrainian War. This conflict has reaching implications that have triggered a rise in oil, gas, wheat, and other commodity prices. As inflation has increased, so has the price of gold. That’s largely because gold is part of what is considered a safe haven asset class. Investors will want to preserve their wealth by moving it into gold assets, or, choose gold over other assets because it presents a more favorable opportunity cost. 

One aspect of your wealth-building journey that should never be a mystery is choosing a trusted and reputable precious metals dealer. The U.S. Gold Bureau aims to bring integrity throughout all aspects of your precious metals acquisition process. As an authorized bulk purchaser of coins and bullion from the U.S. Mint, and an authorized and licensed dealer of investment-grade coins, we are able to offer a range of precious metal assets that allow each client to custom-build their own dream portfolio. 

Call us at 800-775-3504 for a best-price quote or to uncover the mysteries of a lucrative financial future through gold, silver and other precious metals investments.