Why own gold, and what moves its price?

Three arguments

In practice, people own gold for three reasons. It is worth keeping them apart, because they call for different time horizons and different expectations.

Gold produces returns differently

This is the most important insight in gold investing. Gold produces no cash flow: no dividends, no interest, no rent. A kilo of gold is still a kilo of gold a year from now.

A share's value is based on the company making a profit. A bond's value is based on the borrower paying interest. Gold's value is based solely on what the next buyer is willing to pay for it.

What gold is not

Three misconceptions are worth correcting right away.

• Gold is not stable. Its value can fall by tens of percent and stay lower for years. It is not a substitute for cash.
• Gold does not protect against inflation in the short term. It has preserved purchasing power over decades, but in any single year of inflation it can fall.
• Gold is not an automatic crisis hedge. It has often worked that way, but in an acute liquidity crisis gold is sold too, to raise cash.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

The real interest rate is one driver, not the only one

Gold pays no interest. That is why its appeal depends on how much interest you can get elsewhere. This is measured by the real interest rate: the nominal interest rate minus inflation.

No single variable explains the price of gold. The real interest rate is important because it shows the opportunity cost: when a bond investment gives a good real return, holding non-yielding gold costs more. But in individual periods, risk and currency factors and investment flows have explained price swings more than the interest rate component alone. The price of gold is the result of all of these together.

When the real interest rate is high, cash and bonds produce a genuine return, and holding gold means giving up that return. When the real interest rate is low or negative, a bond investment does not preserve purchasing power, and the opportunity cost of gold disappears.

Four drivers

The dollar, central banks and physical demand

The dollar: gold is priced in dollars, so a stronger dollar makes gold more expensive in other currencies. For an investor in the euro area, this means that the return in euros can differ clearly from how the dollar price develops.

Central banks: they are large holders of gold, and their decisions to buy and sell move the market. Central bank purchases have been a significant source of demand in recent years.

Supply and demand: the jewelry industry and technology use gold, and mine production adds to supply slowly. However, these explain less of the price than many people think. Investment demand and real interest rates move the price more than the jewelry trade does.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns. The illustrations are not price forecasts. Gold is not covered by the investor compensation scheme or the deposit guarantee scheme.