What Causes Gold Prices to Move?

Real interest rates

Gold pays no interest or dividend. When inflation-adjusted (real) interest rates are high, holding an asset that pays nothing has a larger opportunity cost, and demand for gold tends to soften. When real rates fall, that opportunity cost shrinks.

This relationship is a tendency, not a rule. There are extended periods where gold and real rates move in ways the textbook does not predict.

The U.S. dollar

Because gold is quoted in dollars, a stronger dollar mechanically makes gold more expensive for buyers using other currencies, which can dampen demand. A weaker dollar has the opposite effect.

Inflation and inflation expectations

Gold is frequently described as an inflation hedge. The historical record is more nuanced: gold has protected purchasing power over very long horizons, but it has also gone through multi-year stretches of underperformance during inflationary periods.

What markets react to most is a change in expectations, not the published inflation number by itself.

Central banks and official demand

Central banks hold gold as part of their reserves. Sustained official buying or selling is a genuine source of demand that operates on a slower timescale than trader sentiment.

Uncertainty and risk sentiment

Geopolitical stress, banking strain, and sharp equity drawdowns often coincide with increased interest in gold. This behaviour is real but inconsistent — gold has also fallen during crises when investors sold liquid assets to raise cash.