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What Determines the Spot Gold Price?

The spot gold price is in a constant state of flux. The price of gold may experience quiet periods as well as volatile periods in which large swings in price may be seen. That being said, there are a number of factors that may potentially influence gold prices.

Current Supply and Demand

As with any other commodity, the current price of gold is driven by supply and demand. Supply and demand may fluctuate wildly based on many different factors, and the spot gold price is a reflection of these forces at work. While there is a limited supply of gold, there are no limits on potential demand for gold. Because of this, gold has the potential to experience rapid and significant rises in price. On the other hand, should demand for gold drop significantly, then the gold price may also potentially see significant drops in price.

Risk Aversion

Gold is commonly referred to as a safe haven asset. This means that investors may elect to buy gold in times of uncertainty. Gold typically has little to no correlation to stocks, for example, and when stocks begin to falter some investors may choose to take capital out of equities and put it to work in gold and other precious metals markets. In addition, investors may elect to add gold to their portfolios for diversification purposes.

Geopolitical Risks and Uncertainty

Because gold is viewed as a safe haven by many, it is often bought during times of geopolitical turmoil.  These issues can take many different forms, and current headlines give some prime examples. The ongoing conflict between Ukraine and Russia, for example, could potentially have a dramatic impact on global financial markets. The continuing debt issues in Greece and the possibility of a Greek exit from the EU could also have a large impact on world markets. In both cases, should equity markets begin to slide, gold and other perceived safe haven assets could potentially benefit.

Gold has been considered a store of value for thousands of years, and has no counterparty risk. In uncertain times, investors may seek out the comfort of gold ownership and potentially drive prices higher in the process.

Outside Markets

Outside markets that may affect the spot gold price include but are not limited to stocks, the dollar index and crude oil. When stocks are moving higher, investors may chase returns in equities. When stocks are moving lower, investors may want to diversify or put capital to work in alternative asset classes such as gold.

Crude oil prices can also affect the price of gold. As crude oil rises, inflation risks become more of a concern. As crude oil prices fall, inflation becomes less of a concern-and in fact deflation may become more of a worry. This is being seen currently with the recent slide in oil prices from $100 per barrel to less than $50 per barrel.

Because gold is denominated in dollars, any movement in the dollar index can drive spot gold prices. As the dollar weakens, gold becomes relatively less expensive for foreign investors and thus prices may potentially rise. On the other hand, as the dollar strengthens, gold becomes relatively more expensive for foreign investors and thus the spot gold price may potentially fall.

Government or Central Bank Buying

Governments and central banks have more purchasing power than other market participants. If one of these entities decides to make a gold purchase or sale, it can affect the spot gold price. When central banks are buying gold, demand is higher and thus prices may potentially rise. When central banks are selling gold, supply is greater and thus prices may potentially fall.

The spot gold price is always moving, and is affected by numerous factors. As with any market, however, the laws of supply and demand drive the spot gold price. Simply put, when gold prices are falling there is more supply and less demand. When gold prices are rising, there is more demand and less supply