There are plenty of factors that influence gold prices, including interest rates, geo-political tensions, currency movement, inflation, liquidity etc – the three that follow are among those that have the highest impact on the gold price.
Economic data mostly coming from the bigger economies like the United States can cause a knee-jerk reaction in prices. For example, housing statistics, employment data, and inflation are major influences that can have a short-term impact on prices. So, if one is looking at weaker jobs growth, rising unemployment, weakening manufacturing, and below than expected GDP growth, it may result in central banks cutting interest rates and pushing gold prices higher. It is therefore important to watch for economic data, especially coming from the United States. Government duties and levies can also impact prices, but they do not change frequently.
Demand and supply
This is an often-overlooked reason for prices to move in either direction, but it does have the potential to alter gold prices dramatically. However, unlike economic data, demand and supply can cause price variation that could have a longer-term impact. For example, if mining is reduced and supply is disrupted, we may see gold prices rallying. On the other hand, if there is a sudden slump in demand and supply rises, it may cause swift variation in gold prices. A sudden increase in buying by central banks across the globe may also see gold prices rallying. Though many gold instruments are available in the electronic format, individuals still prefer physical gold, which pushes demand higher.
Demand from Gold ETFs (Exchange Traded Funds)
Gold ETFs can also impact gold prices. Greater liquidity into Gold ETFs may lead to increased buying from them, pushing gold rates higher, irrespective of whether it is physical gold or ETFs. Recently, one has been witnessing huge liquidity into some of the larger Gold ETFs, which has resulted in greater demand for gold.
It is always difficult to predict the price of gold because there can either be one factor in isolation at play or a number of factors that can simultaneously influence prices. The main advantage of gold is that rates can be relatively more stable, unlike equities, which can be extremely volatile. This gives investors increased faith in gold, as price fluctuations are rarely very dramatic.