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How Supply and Demand Shape the Gold Market

Investment 101Precious Metals 101

Published: February 4, 2025

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Gold has been on a hot streak lately, grabbing the attention of everyone from seasoned investors to beginners looking for a safe haven. In 2024 alone, the price of gold soared past $2,700 per ounce as central banks stockpiled reserves and investors sought refuge from a volatile market. If you’re thinking of adding gold to your investment mix, understanding what drives its value is crucial.

What Really Drives Gold Prices: Supply vs. Demand?

Is it the shortage of gold or the rush to buy it that pushes prices higher? According to experts, it’s all about demand.

“Changes in demand tend to move gold prices more dramatically than changes in supply,” says Daniel Boston, founder of Preserve Gold. Over the past decade, gold mining production has only grown by about 9%, making supply relatively stable.

On the flip side, Kevin Shahnazari, founder of FinlyWealth, emphasizes how quickly demand impacts gold’s value. “When central banks announced major gold purchases last year, I watched prices jump within hours,” he notes. “Supply changes—like mine openings or closures—typically take months to affect prices.”

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Breaking Down Supply and Demand: What You Need to Know

If you want to understand the price of gold, you need to look at both the short-term effects of demand and the long-term effects of supply.

Gold Supply Factors to Watch

While supply changes don’t trigger immediate price swings, they have significant long-term implications. Here’s what you need to consider:

  • Mining Production: A decrease in gold mining creates a supply crunch that can support prices over time. Total gold supply has been flat since 2003, suggesting that this trend might continue.
  • Production Costs: Rising mining costs set a natural price floor. In early 2024, it cost mines about $1,212 per ounce just to break even, establishing a baseline for the market.
  • Supply Inelasticity: Unlike most commodities, gold’s supply doesn’t respond quickly to price changes. This means that when demand surges, there isn’t a rush of new gold hitting the market, which helps maintain its value.

Gold Demand Factors to Watch

Demand, on the other hand, can cause major price spikes in a short amount of time. Here are the key demand drivers:

  • Investment Flows: In 2024, ETF investments in gold doubled year-over-year, hitting a massive 364 tonnes by Q3. This “FOMO factor” drove many investors to seek gold as a safe haven.
  • Central Bank Buying: Major gold purchases by central banks can quickly push prices higher. When multiple central banks start buying, it signals sustained upward pressure on prices.
  • Economic Uncertainty: Geopolitical risks, inflation, and stock market volatility are gold’s best friends. When these indicators spike, so do gold prices.
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The Influence of Central Banks and the U.S. Dollar

Central banks play a huge role in the gold market. When they buy gold, prices tend to rise; when they sell, it can trigger a decline. The fate of gold is also closely tied to the strength of the U.S. dollar. A weaker dollar usually means higher gold prices, as investors flock to precious metals as a safe haven.

Why Gold Still Belongs in Your Investment Portfolio

Whether you’re new to investing or looking to diversify, gold can play a critical role in your portfolio. Sure, supply factors set the baseline for prices, but demand drives the rapid changes that can offer investment opportunities.

Timing the market perfectly isn’t necessary. Instead, experts like Boston recommend a dollar-cost averaging approach—investing a fixed amount regularly to capitalize on long-term trends while avoiding the risk of mistiming the market.

“Gold is always available at the right price,” says Ben Nadelstein, head of content at Monetary Metals. He suggests keeping an eye on demand signals like inflation expectations and geopolitical risks when planning your gold purchases.

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The Bottom Line: Keep an Eye on Gold

Gold is unique among commodities because both its supply and demand factors are unlike anything else. While mining output and costs influence long-term trends, short-term price moves are largely driven by investor demand, central bank activity, and economic uncertainty.

Gold isn’t just about price spikes or downturns—it’s about long-term stability. Whether it’s physical gold, ETFs, or other forms of gold investments, having gold in your portfolio is a hedge against inflation and uncertainty. As always, consult with a financial advisor to make sure you’re investing wisely, and don’t overlook the importance of working with reputable dealers.

In today’s unpredictable financial world, gold is more than just a shiny metal—it’s your anchor in a storm. Make sure it’s part of your investment strategy.

Investment 101Precious Metals 101