Key Drivers That Impact Gold Prices

Central banks can play a large role in the gold market. In recent years, several nations have increased their gold reserves as part of a broader effort to diversify away from the U.S. dollar — a trend sometimes referred to as de-dollarization.

When central banks add to their gold holdings, the impact can be significant because of the scale of their purchases. These flows contribute to structural demand, helping to underpin gold prices over the longer term.

Traditionally, gold has exhibited an inverse correlation with interest rates – i.e. when central banks, such as the U.S. Federal Reserve or the Bank of Canada, cut rates, the value of the U.S. dollar often weakens. Since gold is priced in U.S. dollars globally, a weaker dollar lowers the cost of gold for foreign investors, typically increasing demand. Conversely, rising interest rates tend to strengthen the US dollar and make yield-bearing assets more attractive, tending to reduce gold’s relative appeal.

However, empirical research suggests that this relationship can vary across economic regimes. Apergis, Cooray, Khraief, and Apergis (2019), using a Bayesian Markov-Switching VECM framework, found that the connection between real interest rates and gold prices is not always negative. Their results indicate that gold prices can, at times, respond positively to changes in real interest rates — particularly during recessionary periods when gold can serve as a hedge against macroeconomic uncertainty. This regime-dependent behavior highlights that, while lower yields and softer currencies generally provide a supportive backdrop for gold, the metal’s performance ultimately depends, at least in part,on broader economic conditions and investor perceptions of risk.

Gold is often viewed as a store of value that investors may turn to during periods of geopolitical uncertainty or market volatility.

Whether due to conflict, trade disputes, or broader global instability, heightened geopolitical risk tends to increase demand for gold. Historically, investors have often sought to protect capital through assets perceived as uncorrelated with equities or government debt during turbulent times.

The precious metal’s long-established role and liquidity continue to maintain its perception as a core safe haven choice for many institutional investors and central banks alike.

Beyond financial markets, physical demand for gold remains strong, especially in countries like China and India, where the precious metal has strong cultural significance. Such countries are amongst the world’s largest consumers of gold jewelry and bullion. Cultural and seasonal factors can also play a role. For example, festivals such as Diwali in India and Lunar New Year celebrations in China often drive short-term demand spikes.

While some investors prefer to hold physical gold or gold-backed exchange-traded funds (ETFs), others may look to gold mining equities as an indirect way to gain exposure.

Gold mining companies — or ETFs that hold them — tend to move in response to gold prices, often amplifying the underlying metal’s gains or losses. For investors interested in the sector but unable to hold bullion directly, gold mining stocks can serve as a potential proxy for exposure to gold’s performance.

While no single factor determines gold’s price, understanding how interest rates, global politics, central bank policy, and consumer trends interact can help investors interpret market movements more clearly.
As with any investment, gold carries both potential benefits and risks. While it can enhance diversification and help mitigate downside risk during periods of market stress, gold’s performance may also be influenced by unpredictable factors such as changes in monetary policy, currency movements, and shifts in investor sentiment. As such, the decision to hold gold should align with an investor’s broader objectives, time horizon, and risk tolerance.