What affects the value of gold?

Gold has played an important role in economies and financial systems around the world for centuries. Valued for its rarity, durability, and unique properties, it has been not only a medium of exchange but also a symbol of wealth and power.

Today, gold remains an important component of investors' portfolios, serving as a hedge against economic and political uncertainty. Its status as a "safe haven" makes it particularly attractive during periods of inflation and market volatility, as its value is less susceptible to sharp fluctuations compared to other assets.

Many factors influence the value of gold, such as supply and demand, inflation, the US dollar exchange rate, and global geopolitical tensions. Thanks to its unique role in history and the modern economy, gold is seen as a solid investment that can protect an investor's capital and help diversify their portfolio.

With growing interest in alternative forms of investment, gold remains highly attractive, securing it an important place in financial markets.

Table of contents:

• Factors affecting the price of gold
• Demand and supply in the gold market
• The impact of geopolitics on gold prices
• Analysis of the current gold price
• Investing in gold – advantages and risks
• Gold mining and its impact on the market
• Summary and conclusions

Factors affecting the price of gold

The price of gold is shaped by a number of macroeconomic and geopolitical factors that are currently having a significant impact on global markets.

What determines the price of gold?

1. Inflation - rising inflation, especially in large economies such as the US, often supports an increase in gold prices. Investors see gold as a hedge against currency depreciation. Despite the Fed's (Federal Reserve System, the US central bank) efforts to curb inflation, the rate remains above the target, which increases interest in gold as a "safe haven."
2. US dollar exchange rate – the strong correlation between gold prices and the US dollar exchange rate means that the value of gold usually falls when the dollar strengthens, as a higher dollar makes gold less attractive to foreign investors. Current political tensions and changes in US Federal Reserve policy cause volatility in the dollar exchange rate, which has a direct impact on gold prices.
3. Interest rates – Fed decisions on interest rates affect the attractiveness of investing in gold. Lower interest rates reduce the profitability of interest-bearing instruments, prompting investors to seek alternative investments, such as gold. In 2024, due to the Fed's signaled cuts, there may be an increase in interest in this metal.
4. Geopolitics – the situation in Ukraine and instability in the Middle East are among the factors driving up demand for gold, which is treated as a safe haven asset in times of political instability. When geopolitical risk increases, investors often choose more stable forms of capital investment to protect themselves against potential losses.

Demand and supply in the gold market

The main factors influencing gold prices include dynamic processes related to market supply and demand, including the significant impact of central bank actions, investor interest, and the technological needs of industry.

1. Central bank actions – Central banks, with their significant gold reserves, play an important role in shaping demand. Decisions by these institutions, such as increasing gold reserves, can significantly raise the price of gold by signaling confidence in the metal's stability. In 2023, central banks, particularly those in countries such as China and Poland, purchased over 300 tons of gold, which had a significant impact on price increases, especially in the face of global economic tensions and potential sanctions.
2. Individual and institutional investments – demand for gold is also fueled by investors who, especially in times of uncertainty, treat gold as a safe haven. These investments include the purchase of physical gold as well as gold-based ETFs. Increased investment demand affects prices during periods of US dollar depreciation and low interest rates.
3. Production costs and regulations for the mining industry – gold mining is becoming increasingly expensive, mainly due to rising energy prices and stricter environmental regulations. This increase in costs translates into a reduction in market supply, which, in a situation of stable or growing demand, causes prices to rise.

All these factors combine to create a dynamic market in which the value of gold fluctuates frequently, depending on the availability of the raw material, demand from investors, and decisions made by central banks.

The impact of geopolitics on gold prices

The spot price of investment gold, i.e., the current market price of gold, reflects not only changes in supply and demand, but also the impact of external factors such as the dollar exchange rate or geopolitical tensions, which may increase interest in gold as a safe investment.

Political and economic instability around the world plays a key role in shaping gold prices. Gold, considered a "safe haven," becomes more attractive during periods of geopolitical crisis. When investors fear for the stability of financial markets, armed conflicts, such as the war in Ukraine, increase the demand for precious metals, raising their value. For example, gold prices rose significantly when tensions between Russia and Western countries emerged at the beginning of the Ukrainian conflict.

In addition to the situation in Ukraine, uncertainty surrounding US-China relations is also affecting the gold market. Concerns about escalating trade and political tensions between these two superpowers are causing investors to move their capital into safe-haven assets, which usually drives up the price of gold.

In response to these turbulences, central banks around the world are intensifying their gold purchases to secure their reserves in case of further destabilization. These factors make gold a stable investment commodity, whose price rises in proportion to the escalation of global tensions.

Analysis of the current gold price

Geopolitics and the global economic situation have a key impact on the price of gold, as this metal is often seen as a "safe haven" investment in times of uncertainty. In the face of international conflicts, trade tensions, and other crisis situations, investors turn their capital towards gold, which increases its demand and, consequently, its price.

In 2024, demand for gold remains high, especially as central banks, led by China, increase their reserves of this commodity.

The price of gold is also closely linked to US monetary policy. Announcements of interest rate cuts by the Federal Reserve (Fed) can weaken the dollar, which in turn drives up the price of gold, as the precious metal is priced in this currency.

The current price of gold (as of today) is approximately $2,648.80 per troy ounce, which represents an increase of 41.34% year-on-year. The value of gold is subject to dynamic changes influenced by market factors such as the dollar exchange rate, geopolitical tensions, and central bank actions, which makes gold a popular investment choice, especially in uncertain economic times.

Investing in gold – advantages and risks

Investing in gold requires a well-thought-out strategy, understanding of the market, and risk assessment in order for it to serve as a stabilizer for your investment portfolio.

Advantages:

1. Security in times of crisis – gold, considered a "safe haven," retains its value even during economic and geopolitical instability. In periods of inflation or recession, its price tends to rise, offering capital protection.
2. Inflation protection – the value of gold increases with inflation, making it a good way to preserve the purchasing power of money in the long term. Historically, gold prices have risen when currency values have fallen.
3. Liquidity and global acceptance – gold is readily available and exchangeable, and its value is recognized globally. It can be sold quickly almost anywhere in the world, making it a highly liquid investment asset.
4. Various forms of investment – investors can choose between physical gold (coins, bars), gold-based ETFs, futures contracts, and shares in mining companies – allowing them to tailor their strategy to their individual preferences.
5. Long-term stability – in the long term, gold tends to retain its value or increase in value, making it a stable component of a long-term investment portfolio.

Risks:

1. No regular income – unlike bonds or dividend-paying stocks, gold does not generate regular income. Profits can only be made when its value increases.
2. Changes in the dollar exchange rate – the price of gold depends on the value of the US dollar, as it is priced in dollars. When the dollar strengthens, the price of gold usually falls, which may mean a risk of loss for investors holding gold when the dollar rises in value.
3. Storage and insurance costs – physical gold requires secure storage, which often involves additional costs related to a safe, bank vault, or insurance.
4. Speculative risk – gold is subject to fluctuations in value due to market sentiment and speculation. In the short term, the price of gold can be highly volatile, which can lead to sharp declines and losses.
5. Dependence on supply and demand – the price of gold is largely determined by investment demand and central bank decisions regarding reserves. Changes in these factors can cause price volatility.

You can learn more about this topic in the article: Investing in gold – a beginner's guide for investors.

Gold mining and its impact on the market

The gold mining process (including exploration, extraction, and refining) has a key impact on its availability and prices on the global market. Gold is mainly mined in open-pit and underground mines, and its reserves are concentrated in a few countries, such as China, Russia, Australia, Canada, and the United States. Mining is a costly process, requiring advanced technology and large amounts of energy, which affects the final cost of the metal.

The availability of gold is limited by the depletion of easily accessible resources, which can increase mining costs and drive up market prices. When production is lower and demand remains high, gold prices typically rise. Conversely, when mining is fairly intense, it can lead to price stabilization or decline, although other factors, such as changes in the dollar exchange rate, also play a role.

Political decisions and environmental regulations can also affect the cost and pace of mining. For example, increased environmental restrictions can raise the operating costs of mines and even force some of them to close. All these factors contribute to the volatility of metal prices and its availability on the market.

Summary and conclusions

Gold is one of the oldest and most durable investment assets. It is very popular among both novice investors and experienced market players. Its value increases, especially in times of economic and political uncertainty, as it is often seen as a "safe haven" for capital. 

For those looking for ways to diversify their investment portfolio, gold can be an attractive hedge against market volatility and inflation. With a wide range of investment options available, from bullion coins to gold bars, every investor can find a strategy that suits them. Investing in gold can not only generate profits, but also help build financial stability for years to come.