Understanding Gold Price Factors

Technical Definitions

In the most basic economic sense, the price of gold is simply determined by how much an investor is willing to pay for it, known as its subjective value*. Flowing on from this gives the widely known demand and supply model which gives a market equilibrium price. This equilibrium price is constantly fluctuating due to changes in the willingness and ability of investors to buy gold (demand) and changes in the willingness and ability of producers to provide gold to the market (supply). This explains in a simple way why the gold price constantly fluctuates.

*This should not be confused with what numismatists define as intrinsic value, which refers to the market value of constituent metals within a coin. Intrinsic value from the Labour Theory of Value is a concept defined in a different way. 

Understanding Factors From Producers

Looking into gold producers will give strong indications of how the price of gold can be affected. Factors such as the price of oil, electricity costs, the weather and environment, labour market conditions, political events and domestic legislation are all issues which can have a knock-on effect on how the price of gold is determined. For example, gold mining companies need a substantial amount of electricity and fuel for their operations. If the wholesale price of electricity and the price of oil were to rise, that would be passed on in the form of higher gold prices.

Understanding Factors From Investors

The most obvious factor affecting the demand for gold (and therefore the price) is the ability of investors to actually buy the precious metal. This can be down to levels of income, access issues and legal implications. The most obvious example is a situation where investors cannot afford gold. Retailers will eventually be forced to lower prices to clear excess gold stock. This is the same with willingness to buy gold; if gold proves to be a popular buy in a particular period, investors will bid up the price. This is clearly evident during times of economic uncertainty – during the financial crises between 2008 and 2012 the price of gold skyrocketed due to high demand, as shown in the graph below.

Is the Gold Price Manipulated?

The gold price is constantly manipulated to a certain degree by speculators like any other asset price and any claim that it is not is foolish. However, its reputation as a safe haven asset means it is not subject to as much price speculation as other assets are, especially when factoring in changes over time. The most striking case of this would be when gold and bitcoin are compared. The primary purpose of gold investment is the protection of wealth over time, so it should be pointed out that gold is an ideal medium to long-term investment, and any attempt to play the gold market in the short term is likely to end in disappointment.

You may be interested in reading through our gold and silver information and advice section of the website.