Why Does the Price of Gold Change? A Beginner's guide

For centuries, gold has been synonymous with enduring value, often pictured as intricate jewellery or gleaming bars in a vault. But it is also a major financial asset whose price fluctuates daily, driven by global events and economic forces. How can an asset that has been valued for millennia be so sensitive to a press release from the U.S. Federal Reserve? This guide explains that duality.

This is to simply explain the main factors that drive gold prices, making the topic accessible to anyone new to financial markets. To begin, you first need to understand the single most important concept for gold's value: its role as a "safe-haven" asset.

In the financial world, a "safe-haven asset" is an investment expected to retain or increase in value during periods of market turbulence and economic uncertainty. When investors are fearful about the future, they often sell riskier assets, such as stocks, and buy safe havens to protect their wealth. Gold is widely considered the ultimate safe-haven asset.

According to a 2025 survey of global central banks, there are several key reasons why gold is trusted to preserve value, especially when confidence in other assets falters:

• Long-term store of value/inflation hedge: Gold is trusted to maintain its purchasing power over long periods. When the value of currencies (such as the U.S. dollar) declines due to inflation, gold's price often rises, helping preserve wealth. An overwhelming 88% of central banks view this as a key reason to hold gold.

• Performance during times of crisis: When investors and governments are worried about the economy or geopolitical events, they turn to gold for stability. This increased demand drives up its price. According to the survey, 82% of central banks see this as a relevant factor.

• No default risk: Unlike a company's stock or a government's bond, gold's value isn't dependent on a promise to pay. A company can go bankrupt, and a government can default on its debt, but gold's intrinsic value remains. This is a critical characteristic for 72% of central banks.

This safe-haven status creates a direct link between global events and gold prices. As the World Bank concluded, "When uncertainty rises, gold rallies." This is why central bank reserve managers cite "geopolitical instability" as one of their most important factors in decision-making. This concern is especially pronounced among Emerging Market and Developing Economies (EMDEs), where 76% of central banks rate it as relevant, compared with 67% among their advanced-economy counterparts. Tellingly, the survey also notes a "notable convergence" in views, with advanced economies now valuing gold's financial role more highly than in previous years.

 

While global events provide the backdrop, gold's day-to-day price movements are often driven by its relationship with two crucial financial factors. To truly understand the day-to-day price of gold, you need to grasp two powerful inverse relationships. Think of them as a financial seesaw: when one side goes up, gold tends to go down, and vice versa.

These inverse relationships with the dollar and interest rates are not just abstract theories; they directly influence the purchasing decisions of the two most powerful players in the gold market: central banks and investors.

Demand is a critical driver of any asset's price, and for gold, two groups of buyers are particularly influential: the world's central banks and large-scale investors. Understanding who is buying gold is crucial to understanding its price.

Central banks, the institutions that manage a country's currency and monetary policy, are major and consistent buyers of physical gold. They hold gold as a core part of their foreign reserves to ensure stability. This aggressive buying is the direct result of the factors we've discussed: a strategic move to hedge against geopolitical risk and diversify away from a U.S. dollar that they are increasingly pessimistic about.

• Central banks have been buying gold in near-record amounts, adding 1,082 tonnes in 2022 and 1,037 tonnes in 2023.

• The 2024 survey showed that this trend is set to continue, with 29% of central banks intending to increase their gold reserves further. This consistent buying creates a strong and stable floor of demand for gold.

Individual and institutional investors also heavily influence gold's price. They participate in the market in two main ways: by buying physical gold (bars and coins) and through financial products such as gold-backed ETFs. Exchange-Traded Funds (ETFs) allow investors to gain exposure to gold's price without the challenges of storing and insuring the physical metal themselves.

According to the "Gold Demand Trends Q3 2025" report, both forms of investment were key drivers of the price rally in the third quarter of 2025, which saw huge ETF buying (+222 tonnes) and continued strong demand for physical bars and coins.

To understand why gold prices change, it's essential to remember the core forces of global uncertainty and financial markets that shape its value. Here are the most critical factors distilled into a simple list:

1. Gold as a Safe Haven: In times of global uncertainty, economic anxiety, and geopolitical tension, investors flock to gold for its stability, pushing its price up.

2. The U.S. Dollar Relationship: Gold generally moves inversely with the U.S. dollar. A weaker dollar makes gold cheaper for foreign buyers, often leading to a higher price.

3. The Interest Rate Relationship: Gold also tends to move inversely with interest rates. Lower rates reduce the opportunity cost of holding non-yielding gold, making it a more attractive asset compared to interest-paying investments.

4. Major Market Movers & The Big Picture: These factors are interconnected. Geopolitical uncertainty (Point 1) can weaken the U.S. dollar (Point 2) and lead central banks to lower interest rates (Point 3), which in turn encourages both central banks and large-scale investors to buy gold, driving its price higher.