Gold has historically been recognized as a store of value, but its measurement and valuation are influenced by multiple factors that distinguish it from other commodities. Unlike assets such as stocks or bonds, gold functions both as a financial asset and a physical resource, making its valuation complex.
One common way to measure gold’s value is through its price in terms of currencies, particularly the US dollar. Since gold is traded globally, fluctuations in the strength of the dollar significantly impact its price. A weaker dollar tends to drive gold prices higher, while a stronger dollar usually leads to a decline in gold prices. Another important measure is the Gold-Oil Ratio (GOR), which represents how many barrels of oil one ounce of gold can purchase. Historically, this ratio has varied significantly. For instance, in 1973, the GOR was nearly 34, meaning gold held significant purchasing power compared to oil. However, during the first oil shock in 1974, the ratio fell to around 13, and by September 1976, it had dropped further to 8. The lowest recorded GOR was 6.4 in June 2008, demonstrating how fluctuations in commodity prices affect gold’s relative value.
Gold is often considered an inflation hedge, preserving purchasing power during periods of rising inflation. However, its effectiveness in this role depends on the timeframe analyzed. Between 1984 and 2004, gold prices remained mostly flat, despite inflation averaging around three percent per year. In contrast, from 2004 to 2024, gold prices increased sixfold, even though inflation was relatively low during much of this period. More recently, from 2012 to 2023, gold failed to keep pace with inflation, leading to a real loss of nearly ten percent. The impact of inflation on gold’s value is therefore inconsistent and influenced by additional macroeconomic factors.
Another key aspect of gold’s valuation is its relationship with stock markets. Historically, gold has exhibited a negative correlation with equities, meaning it tends to rise when stock markets decline. Studies have confirmed that gold serves as a hedge against stock market volatility, particularly during financial crises. However, in the long run, investments in stocks have generally outperformed gold. Since 1928, the annual return on gold has averaged less than five percent, while the S&P 500 has delivered annual returns of approximately 9.6 percent when including dividends. Although gold is effective for preserving value during crises, it has not consistently provided the same level of long-term growth as equities.
Gold prices are driven by a combination of economic conditions, monetary policy, market demand, and geopolitical events. One of the most fundamental factors influencing gold’s price is supply and demand. Unlike other commodities, gold’s supply is relatively stable because mining output does not fluctuate dramatically in the short term. Demand, on the other hand, comes from multiple sources, including jewelry, investment markets, and industrial applications such as electronics and medical technology.
The value of the US dollar plays a critical role in determining gold prices, as the two assets generally move inversely to one another. When the dollar strengthens, gold prices tend to decline, whereas a weaker dollar makes gold more attractive to investors, driving its price higher. However, this relationship is not always straightforward, as seen in 2022 and 2023 when the Federal Reserve aggressively raised interest rates to combat inflation. Despite this tightening monetary policy, gold prices peaked multiple times, demonstrating that additional factors were influencing its value.
Inflation expectations and interest rates also have a strong impact on gold prices. Typically, gold prices rise when inflation expectations increase because investors seek protection against currency devaluation. Interest rates play a crucial role in this relationship. When interest rates rise, holding gold becomes less attractive because it does not generate interest or dividends, making other assets like bonds more appealing. Conversely, when interest rates fall, gold becomes more desirable, leading to price increases. A historical example of this can be seen in the early 1980s when Federal Reserve Chairman Paul Volcker implemented a restrictive monetary policy to control inflation. During this period, gold prices fell significantly due to rising interest rates. In contrast, after the 2008 financial crisis, central banks around the world adopted expansionary monetary policies, leading to a surge in gold prices.
Gold is also valued for its role as a safe-haven asset during periods of geopolitical and economic instability. In times of crisis, investors often turn to gold as a secure store of value. This was evident in early 2022 when Russia’s invasion of Ukraine led to a six percent increase in gold prices within the first quarter of the year. Similarly, during the 2008 financial crisis, gold prices soared as investors sought refuge from declining stock markets. Gold also serves as a hedge against currency depreciation. When a domestic currency weakens significantly, investors often move their wealth into gold to protect its value. A recent example of this occurred in Turkey, where runaway inflation and an unstable monetary policy led to a surge in gold demand as the Turkish lira lost its value.
Central bank policies also play a major role in determining gold prices. Many central banks hold gold as part of their official reserves, using it as a safeguard against economic instability. Unlike foreign currency reserves, gold is not subject to credit risk, inflationary monetary policies, or currency devaluation. This makes it a unique asset within central bank portfolios. In recent years, countries like China and Russia have increased their gold holdings to reduce their dependence on the US dollar, further influencing global demand for the metal.
Ultimately, gold’s price is shaped by a complex interplay of macroeconomic factors, investor sentiment, and central bank policies. While gold has historically served as an inflation hedge and safe-haven asset, its performance is not always predictable. Factors such as changes in interest rates, stock market fluctuations, geopolitical risks, and currency values all contribute to gold’s market behavior, making it an essential asset for investors seeking stability in uncertain times.
Paweł Kowalewski & Dominik A. Skopiec, 2024. "Price processes in the global gold market," Bank i Kredyt, Narodowy Bank Polski, vol. 55(4), pages 381-424, January.