Why does gold go up?

Gold prices are driven by a combination of macroeconomic forces, central bank behavior, and investor sentiment. Understanding these drivers is essential because gold often behaves differently from other assets, making it a potential diversifier and hedge in investment portfolios.

The single most important driver of gold prices is the real interest rate, specifically the US 10-year TIPS yield. Gold pays no income, so holding it carries an opportunity cost equal to the real yield available on safe government bonds. When real yields fall (or turn negative), the opportunity cost of holding gold diminishes, and gold becomes more attractive. When real yields rise, gold faces headwinds. The inverse correlation between gold and real yields has been strong and persistent over decades.

Central bank gold purchases have become a significant demand driver, particularly since 2022 when Western nations froze Russian central bank reserves following the invasion of Ukraine. That event prompted many central banks, especially in China, India, Turkey, and other non-Western nations, to accelerate gold purchases as a way to diversify reserves away from dollar-denominated assets that could potentially be frozen. Annual central bank gold buying has roughly doubled from pre-2022 levels.

Geopolitical uncertainty and currency debasement fears also support gold. During wars, financial crises, and periods of aggressive money printing, gold traditionally benefits from safe-haven flows. Gold's 5,000-year track record as a store of value gives it a cultural and psychological anchor that no other asset possesses.

The relationship between gold and the US dollar is generally inverse: gold tends to rise when the dollar weakens and fall when the dollar strengthens. This is partly mechanical (gold is priced in dollars, so a weaker dollar makes gold cheaper in other currencies, stimulating demand) and partly fundamental (factors that weaken the dollar, such as loose monetary policy, tend to also support gold). However, in periods of extreme global stress, both gold and the dollar can rally simultaneously as safe-haven assets.