Gold

Gold has been a store of value for thousands of years. Today it is held by central banks, investors, jewellers and industry, and it trades around the clock in London, New York, Shanghai and other centres. Gold pays no interest or dividends, so its price depends on what investors are willing to pay to hold it compared with interest bearing alternatives, and on demand for safety during crises. Understanding these drivers helps explain why gold can rally in very different environments.

How gold is traded#

What drives gold prices#

Real interest rates#

Because gold yields nothing, the opportunity cost of holding it is the real (inflation adjusted) interest rate. When real yields fall, gold tends to rise; when they rise, gold tends to fall. Traders often compare gold with the yield on 10 year Treasury Inflation Protected Securities (TIPS). See Interest Rates and Treasury Bills, Notes and Bonds.

The US dollar#

Gold is priced in dollars. A weaker dollar makes gold cheaper for buyers using other currencies, which tends to support prices. See Currency Correlations.

Safe haven demand#

During crises, wars and financial stress, investors often buy gold. It rallied during the 2008 financial crisis aftermath, the European debt crisis and periods of geopolitical tension, though in sharp liquidity crunches, such as March 2020, gold can fall at first as investors sell anything to raise cash.

Central banks#

Central banks hold large gold reserves and have been net buyers since 2010. According to the World Gold Council, central bank purchases exceeded 1,000 tonnes a year in 2022 and 2023, among the highest levels on record, led by countries such as China, Poland and Turkey.

Inflation#

Gold is often seen as an inflation hedge over very long periods, but its short term relationship with inflation is inconsistent. Real rates usually matter more. See Inflation.

Physical demand#

Jewellery demand, especially from India and China, and technology uses add to demand. Price dips often draw physical buyers.

Gold's historical moves#

How traders approach gold#

• Macro traders follow real yields, the dollar and central bank policy. See Macro Trading.
• Trend followers trade gold's long trends. See Trend Following.
• Hedgers use gold to diversify portfolios. See Diversification.
• Spread traders use the gold silver ratio and gold versus mining stocks. See Silver.

Risks#

• Long drawdowns: gold lost more than 60% of its value from 1980 to 2001 in nominal terms.
• No income: holding gold has an opportunity cost.
• Storage and premiums for physical gold.
• Leverage in futures.

Frequently asked questions#

What drives the price of gold?#

Mainly real interest rates, the US dollar, safe haven demand, central bank buying and physical demand from jewellery and investment.

Is gold a good inflation hedge?#

Over very long periods it has preserved purchasing power, but in the short term its link to inflation is unreliable; real interest rates usually matter more.

How can I trade gold?#

Through COMEX gold futures, physically backed ETFs, bars and coins, mining stocks and options.

Next, learn about the more volatile precious metal in Silver.

Sources#

• World Gold Council, Gold demand trends