Three Drivers of Gold Prices

The comments below are an edited and abridged synopsis of an article by Arkadiusz Sieron

We cannot value gold. It does not generate any cash flows, which we could discount. But it doesn’t mean that the price of gold changes randomly. Market sentiment is powerful in the precious metals market, but the same applies to other markets. However, it does not operate in a void. There are some important fundamental drivers at work. The precious metal market seems to be emotional and without any logic, but there are important forces in action. What are they?

Research shows that the most important elements in gold’s puzzle are: real interest rates, the US dollar, and risk aversion. That is the Golden Triad of Gold’s Drivers, and Sieron discusses them here.

In conclusion: Gold demand depends on investors’ psychological perception of  the value of gold. Such market sentiment is dependent on a myriad of interrelated variables. The most important are the level of real interest rates and the strength of the US dollar, but also the level of confidence in the economy among market participants. Low real interest rates, a weak greenback and high risk aversion are bullish for gold. High real interest rates, a strong US dollar and low risk aversion are bearish. Hence, when you invest in gold, focus on these factors.