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How Is the Price of Gold Determined?
By Money Staff MONEY RESEARCH COLLECTIVE
Gold showed its tremendous growth potential in 2024. As of December, the precious metal reached prices exceeding $2,600 per troy ounce, or about an 80% increase from its price five years ago.
That gain is enough to cause anyone to rethink how they invest their money. If you’re considering investing in gold, understanding how gold’s price is determined — and the factors that influence it — is key to becoming an informed investor.
Current cold prices
You can buy gold in many forms; it’s often sold by the ounce or gram. However, when investors talk about gold prices, they typically mention the price per troy ounce. That measurement is a standardized way to track and compare gold’s performance and valuation: One troy ounce equals 31.1034768 grams, or 10% more than a traditional ounce.
Using this standard makes it easier to see trends and make informed investing decisions based on historical data. For example, gold’s price per ounce was about $1,475 in December 2019. Since then, its price has grown by over $1,000 per ounce.
The London Bullion Market Association and gold pricing
Gold’s price is tied to the London Bullion Market Association (LBMA). The LBMA is a global authority on the precious metals market, and it regulates and oversees over-the-counter, or OTC, trading of gold and silver.
The LBMA is responsible for setting and maintaining standards for the gold industry, and it also establishes the LBMA Gold Price — a benchmark price for gold that governments, bankers and financial institutions use.
The LBMA Gold Price is updated twice per day: at 10:30 a.m. and 3:00 p.m. UK time (5:30 a.m. and 10:00 a.m. EST). The price is reflected in U.S. dollars and is set through an electronic auction process administered by the ICE Benchmark Administration. The auction matches buy and sell orders from approved participants, and the results of the auction guide the LBMA Gold Price.
Factors affecting gold prices
While the LBMA plays a critical role in determining gold’s price per ounce, there are several factors that drive price fluctuations:
Global supply and demand
Supply and demand is a critical factor in setting gold’s price. Gold is not an unlimited resource; the supply is dependent on mining activity. When mining costs — such as energy prices or wages — increase, gold’s supply can decrease. With a decreased supply, prices go up since gold is more scarce.
Plus, gold is a key component of many technology products and jewelry. When there is a strong demand for these products, gold’s price typically increases. For example, gold’s price often increases around the holidays, corresponding with an uptick in demand for gold jewelry as gifts.
Gold markets
Gold markets are significantly influenced by government reserves and central banks’ gold buying. Many governments gold reserves of gold as part of their monetary policies. When central banks, such as the U.S. Federal Reserve or the Central Bank of the Russian Federation, increase their gold holdings, which can drive increased prices.
Political issues
Gold has long been viewed as a relatively safe investment. When economic conditions are uncertain, or if there is a higher level of political unrest or uncertainty, many investors turn to gold to protect their wealth. Gold’s price tends to increase during recessions, political crises and economic disruptions.
For example, gold’s price skyrocketed during the COVID-19 pandemic. As countries worldwide dealt with factory and manufacturing closures, worker shortages and supply chain issues, the precious metal’s price went from $1,589 in February 2020 to $1,975 in August 2020 — an increase of 24% in just six months.
What impacts the price of gold ETFs?
Gold ETFs can be a useful alternative to investing in physical gold. ETFs, which may track the performance of gold or invest in gold-related companies, make gold a more liquid investment, but their prices vary from gold’s price per ounce.
The price of an ETF is affected by the following:
- Gold’s spot price: The gold spot price is the current market price of gold per troy ounce. Most ETFs track the spot price of physical gold, so ETF pricing will fluctuate along with the spot price.
- Expense ratios: ETFs carry expense ratios, or fees associated with the marketing, administration and management of the funds. These fees are a percentage of the assets invested. For example, an expense ratio of 0.25% means you will pay a quarter of one percent on your investment amount annually. Because of expense ratios, your returns may not match the performance of gold since the fees may erode your profits.
- Market conditions: ETFs are bought and sold on the traditional stock market exchanges. If there are other ETFs that have lower fees or different holdings, the competition can affect your ETF’s price.
- Demand: Gold has increased in popularity among investors, and that’s especially true for gold ETFs. Among high-net worth investors, 47% of investors hold gold ETFs.With increased demand and more investors turning to gold, ETFs prices may go up.
Gold’s price is driven by several factors, including supply and demand, market changes, international issues and economic uncertainty. Whether you plan on investing in physical gold or gold ETFS, understanding the interplay between these factors and gold prices can help guide your investment decisions as you build a well-diversified portfolio.