How Does the Value of Gold Get Determined?

Supply and Demand

Gold prices are driven primarily by the same principles that drive costs in all areas of the free market: supply and demand. However, when it comes to gold, there are a few nuances that make it just a bit different than most other commodities. One of these is the fact that gold is a non-perishable item that will never go bad and will never be thrown out or upgraded. Studies have shown that most of the gold that has been mined throughout history is still out there. A lot of gold's pricing has to do with changes in favor over the years with the general populace and professional investors.

The Role of Central Banks

Central banks hold the majority of the world's wealth when it comes to gold. They have these reserves as insurance against their clients' money. Because these banks have such a large portion of the world's gold, much is dependent on their reserves and their individual policies when it comes to the cost of the gold itself. If a central bank in Europe decided to sell or expand a portion of its reserves, this can easily and quickly change the cost of gold.

Factors That Often Raise the Price of Gold

While a central bank selling off a portion of gold can only lower the cost, there are some factors that can substantially raise the price of gold. One such factor is bank failures. This is not a bank collapsing altogether, as there are federal insurance policies in place to prevent customers from losing their money in such a way, but rather when customers are suddenly facing lower investment returns and higher costs of portfolio management. At these times, if the problem is widespread, gold can easily go up in value. Another factor that can raise the price of gold is worldwide crisis, such as terrorism or war. Any time there is uncertainty in the socio-political climate, money markets are going to take a hit. This is when gold finds itself in demand, as people look for investments that will not lose their value.