What drive precious metal prices?
Learning objectives
Explain why real interest rates are the dominant driver of gold prices
Rank the other drivers and say which apply to silver but not to gold
Recognise when two drivers are pulling in opposite directions
What moves a metal?
Before you even think about trading precious metals, you need a solid grasp of the factors that move their price.
Gold has one driver that matters more than the rest combined, and a handful that matter at the margin. Getting the order right is most of the analysis.
Real interest rates
Start here, because everything else is secondary.
Gold pays no yield. No dividend, no coupon, no interest. So the cost of holding it is whatever you gave up by not holding something that does pay.
That comparison isn't against the headline interest rate. It's against the real interest rate, which is the nominal rate minus inflation, because what matters is the return after inflation has eroded it.
Work the two cases through:
When real rates are high, safe interest-bearing assets deliver a genuine return after inflation. Holding gold means forgoing that, and the opportunity cost is significant. Gold tends to weaken.
When real rates are low or negative, those assets return little or lose purchasing power. Gold's lack of yield costs you nothing in comparison, and the argument for holding a scarce asset strengthens. Gold tends to rise.
This is why gold responds so sharply to central bank policy and to inflation data. Central banks 101 explained that markets price an expected path of decisions rather than today's rate. Gold trades that expected path, adjusted for expected inflation, and it does so continuously.
If you learn one relationship in this course, learn this one. A large share of gold's major moves are explicable through it.
The US dollar
Gold is priced in dollars, so dollar strength mechanically lowers the quote, exactly as Gold trading 101 set out. Buying XAU/USD is being short dollars.
There's a second, non-mechanical effect too: a stronger dollar makes gold more expensive for buyers holding other currencies, which weighs on physical demand.
Two caveats. The relationship is a tendency and breaks regularly, particularly when both gold and the dollar rally together in a genuine crisis as capital moves to everything perceived as safe. And it partly overlaps with the real rate story, since rate expectations move the dollar too. Don't count the same driver twice.
Central bank buying
Central banks hold gold in their reserves and have been meaningful net buyers in recent years, particularly among emerging market economies diversifying away from dollar holdings.
This matters differently from the other drivers because it's price-insensitive demand. A central bank diversifying reserves over a decade doesn't stop because gold got more expensive this quarter. It's a slow structural bid underneath the market rather than a source of daily movement.
Quarterly data on central bank purchases is published by industry bodies. Useful for understanding the backdrop, not for timing anything.
Risk sentiment
Gold is one of a small group of assets that attract capital during genuine market stress, alongside the dollar, the yen and government bonds.
The effect is real, fast and unpredictable, because the events causing it are unscheduled. How to trade news events was clear that unscheduled events are a position sizing problem rather than a trading opportunity, and that applies squarely here.
Note the potential conflict. A crisis drives safe-haven buying, which supports gold. The same crisis may drive expectations of tighter or looser policy, which moves real rates, which pushes gold the other way. Which force wins isn't reliably predictable, and that's a good reason not to build a position on a single-driver story.
Supply
Least important, and worth understanding precisely because of that.
Annual mine production is small relative to the vast above-ground stock, as Why traders trade gold explained. Recycling adds a further supply that responds to price: when gold rises, more scrap comes to market.
So a mine disruption that would move copper substantially barely registers in gold. Supply news is not a gold trading signal, and content presenting it as one has misunderstood the asset.
What's different for silver?
Silver shares all of the above and adds one large driver of its own.
Industrial demand, around half of total consumption, tracks manufacturing activity: solar installation, electronics production, general industrial output. This is a growth-cycle driver that gold simply doesn't have.
The practical consequence, as Silver trading 101 covered, is that silver can be pulled in two directions at once. In a growth scare, the monetary case for precious metals strengthens while the industrial case weakens. Gold rises, silver falls, and nothing has gone wrong.
Silver's supply picture also differs. Much of it comes as a by-product of copper, lead and zinc mining rather than from dedicated silver mines, which means silver supply responds to the economics of other metals rather than to the silver price. Supply is therefore less price-responsive than you'd expect.
Putting them in order
For gold, roughly:
- Real interest rate expectations. Dominant.
- The US dollar. Significant, partly overlapping with the above.
- Risk sentiment. Powerful when it appears, unschedulable.
- Central bank buying. Slow structural backdrop.
- Supply. Rarely relevant.
For silver, insert industrial demand at position two or three depending on where the growth cycle is, and expect it to conflict with the others more often than it agrees.
What to actually watch
Given all that, a short list:
- Central bank meetings and guidance, for the rate path
- Inflation data, which combines with the rate path to give real rates
- The dollar, as continuous background
- Manufacturing surveys, if you trade silver
- Quarterly central bank purchase data, for context only
And the standing caution from What is fundamental analysis?: every relationship here is a tendency. They hold often enough to be worth knowing and break often enough to ruin anyone treating them as rules.
Key takeaways
Real interest rates dominate gold. With no yield, gold's attractiveness depends on what interest-bearing assets return after inflation
Dollar strength lowers the quote mechanically and weighs on physical demand, but the relationship breaks in genuine crises when both rally together
Central bank buying is price-insensitive structural demand, and supply is close to irrelevant given the size of the above-ground stock
Silver adds industrial demand as a major driver, which regularly conflicts with the monetary case and can send the two metals in opposite directions