How is the price of gold determined?


We have already mentioned that gold is a value proven by the whole history of civilization. But who sets the price for the yellow metal, and what factors does it depend on? It's time to discuss it.

Who defines the price of gold?

Historically, since the 17th century, the main regulator of the gold price has been Great Britain, to be exact - its capital, London. Consequently, gold price was initially pegged to British pound sterling and only after the United States gained more and more influence upon the world market, the price was set in U.S. dollars. Despite the fact that after World War II the "gold" center of Europe moved to Switzerland, over time London has restored the "status quo". Today, gold bars are certified here. The London Metal Exchange sets the price of gold on a daily basis. Moreover, the price is fixed twice a day. Apart from the London Metal Exchange itself, the central banks of the so-called "Gold Pool" are involved in setting price. Exactly with their help gold prices are set in three currencies at once - pounds, US dollars and euros.

The second important regulator of the gold price is the U.S. exchange, COMEX. While London sets the gold spot price, New York regulates the futures price. Why do these two cities dictate the price of gold all over the world? That's easy. The lion's share of trade in the precious metal is concentrated in these two cities: London has 78% of the gold market, while COMEX has 8%.

As a result, the price of gold in the world is determined as a combination of these two indicators, set in London and New York.

What affects the price of gold?

Of course, neither of these two stock markets takes the price of gold "out of nowhere''. The cost of an ounce is formed based on many factors. In addition to economic factors, many social factors are taken into consideration. The most important of them are:

  • Fluctuations in the U.S. dollar. Being a popular investment, this currency also sets the pace and the gold price. As soon as the U.S. dollar plummets, investors want to get rid of their currency surplus and convert it to gold. The demand for the metal goes up, and accordingly, the price also rises.
  • Natural disasters and epidemics. During such events gold production declines and the price of gold increases. In addition, during a pandemic or natural disaster gold is the most protected asset, which gives peace of mind. A prominent example is the increased interest in investing in gold in 2020 during the COVID-19 pandemic.
  • Similarly to natural disasters, political instability, wars and economic crises influence gold prices. In a volatile economy, people prefer to invest in classic investment instruments, which will not devalue in an instant. Accordingly, gold is in high demand and rises in price.
  • The volume of gold mining by different countries. The more gold is mined, the cheaper it is. Unfortunately, even with the improvement of technology, gold mining is not increasing worldwide. On the contrary, it tends to shrink. This in turn leads to higher prices for the yellow metal.

All of these factors play a role in both the global price of gold and in setting the price in local state markets. Therefore, on a country scale, the gold exchange rate may differ from the official London rate, but trends are the same all over the world.