What Determines the Spot Gold Price?

The simplest answer is the law of supply and demand. If buyers are trying to buy gold, sellers may lift prices causing buyers to bid higher. On the other hand, if sellers are overwhelming buyers, those looking to acquire gold may bid lower, thus driving prices down in the process.

Of course, spot gold prices can be affected by many inputs that influence the supply/demand equation. The actual spot price of gold is derived from the nearest month gold futures contract with the most volume. This could be the nearest month, or front month, or it could be a month or two out on the time horizon.

What are Some of the Factors That Drive Spot Gold Prices?
Gold is not only bought as an investment, but it is also bought for use in other areas such as industry and jewelry making. The potential influences on the spot price are extensive, but the following list names some of the major ones:
• Investment demand
• Jewelry demand
• Currency markets
• Inflation or deflation
• Interest rates and/or monetary policy
• Risk aversion or appetite
• Geopolitics
• Equity markets

Gold can potentially see stronger investment demand during periods of economic or geopolitical stress. For example, spot gold may potentially move higher during times of war or geopolitical unrest.

From an economic standpoint, gold may potentially see increased buying from a stock market collapse or bear market. Interest rates and monetary policy can also have a significant effect on the spot gold price. Gold may potentially benefit during periods of ultra-low interest rates, as low rates make the opportunity cost of holding gold less. On the other hand, gold may potentially come under pressure as interest rates rise, due to the fact that gold does not offer any dividend or interest for holding it.

Currency markets are another major driver of the spot gold price. Although gold is traded all over the globe, it is often denominated in dollars. As the dollar rises, it makes gold relatively more expensive for foreign buyers and may potentially cause declines in the spot price. On the other hand, a weaker dollar may potentially make gold relatively less expensive for foreign investors, and can potentially cause spot gold prices to rise.