Since 2007 the world has seen a period of striking economic and financial volatility featuring the deepest
recession since the 1930s despite this gold has performed strongly with its price roughly doubling since the global financial crisis began in mid-2007.
Determinants of the price of gold
1. Gold and real interest rates:
One of the factor that influences gold prices is real interest rate which is to some extent related to inflation. Since gold lacks a yield of its own, the opportunity cost of holding gold increases with a real
interest rate increase and decreases with a fall in real interest rates.
2. Gold and the US dollar:
The external value of the US dollar has been a significant influence on short-term gold price movements.
The IMF estimated6 in 2008 that 40-50% of the moves in the gold price
since 2002 were dollar-related, with a 1% change in the effective
external value of the dollar leading to a more than 1% change in the
gold price (Source).
3. Gold and financial stress:
It is a significant and commonly observed influence on the short-term price of gold.
In periods of financial stress gold demand may rise for a number of
- Steep declines in the value of other assets such as equities and high volatility of asset prices, leading to demand for a more
stable store of value uncorrelated with other assets.
- Fears about the security of other assets such as bonds due to the possibility of default, and even fears about cash if the health of
the banking system is in question – the fear of systemic collapse
- The need for liquidity in an environment where it may be difficult to realise the value (or the full value) of other assets. (Source)
4. Gold and political instability:
It is another factor that can boost gold prices.
Investor concerns about wars, civil conflicts and international
tensions can boost demand for gold for similar reasons to those noted
above for periods of financial stress. Gold‟s potential function as a
„currency of last resort‟ in case of serious system collapse provides
a particular incentive to hold it in case the political situation is
especially severe. (Source)
5. Gold and official sector activity:
The behaviour of central banks and other parts of the official sector can have an important impact on gold
One reason for this is that central banks are big holders of gold,
possessing some 30,500 metric tons in 2010, which is approximately 15%
of all above-ground gold stocks. As a result, central bank policies on
gold sales and purchases can have significant effects, and these
policies have been subject to considerable shifts over the decades. (Source)
(Source of above graphs)