Why Do Gold Prices Change? A Guide for Investors

The World Gold Council divides global gold demand into four main categories: jewellery, technology, investment in bars, coins and exchange-traded funds, and central bank purchases. According to the World Gold Council's breakdown of gold's sources of demand, investment demand and central bank buying together make up a large and growing share of annual net demand, while jewellery has historically been the single largest component. When investment demand rises sharply, for example because more investors buy gold ETFs or physical bars, it typically puts upward pressure on the price, because the supply of newly mined gold only grows slowly from year to year.

The supply side of the market is relatively inelastic in the short term. Gold mining requires large capital investment and lengthy permitting processes, so a rising price does not quickly translate into much higher output. This means that price swings are largely driven by the demand side and by how much gold is released from existing stocks, including recycled scrap gold. When prices rise sharply, the volume of recycling typically increases, because it becomes more attractive to sell old gold jewellery for melting down, which can dampen further price increases over the medium term.

Gold pays no interest or dividend. When interest rates rise, it becomes relatively more expensive to hold gold instead of interest-bearing assets such as government bonds, because you forgo a higher return by owning the metal instead. This relationship is known as the opportunity cost, and it is one of the most well documented drivers of the gold price. The World Gold Council has repeatedly pointed out that real interest rates in particular, meaning the nominal rate minus inflation, have a significant influence on gold's performance over time.

When real interest rates fall or turn negative, investors lose less by holding gold rather than bonds, and gold becomes relatively more attractive. Conversely, rising real rates can put pressure on the gold price, because the alternative of holding bonds or cash deposits becomes more rewarding. For investors in the eurozone or in Denmark, it is worth watching both US Federal Reserve policy, because gold is priced in dollars, and the European Central Bank's rates, which Danmarks Nationalbank tracks closely through its fixed exchange rate policy against the euro.

Gold is priced internationally in US dollars per troy ounce. This means that when the dollar strengthens against other currencies, gold becomes, all else equal, more expensive to buy for investors outside the United States, which in isolation can dampen demand and put downward pressure on the dollar price. Conversely, a weaker dollar can support the gold price in dollar terms, because the metal becomes cheaper for investors holding other currencies.

For investors outside the US, it matters to distinguish between the gold price measured in dollars and the gold price converted into their home currency. For someone holding kroner, because the Danish krone is pegged to the euro through Danmarks Nationalbank's fixed exchange rate policy, it is in practice the euro-dollar rate that determines how much a move in the gold price translates into kroner. If the dollar strengthens against the euro, the krone gold price can rise even if the dollar gold price is unchanged, and vice versa. Following the dollar price alone is therefore not enough to understand what a gold holding is worth in kroner.

Gold is often described as a hedge against inflation, because the metal has historically preserved its purchasing power over very long periods. The World Gold Council notes that the relationship between gold and inflation is clearest over decades and during periods of high or accelerating inflation, while the short-term relationship, from one month to the next, is far less reliable and can vary considerably.

This means gold does not necessarily move in lockstep with the consumer price index from one month to the next. Instead, gold's role as an inflation hedge is best understood as a long-term characteristic that can help preserve the real value of wealth over many years, rather than as a precise short-term hedge against a specific rate of price increases.

Throughout history gold has acted as what is often called a safe haven during periods of war, financial turmoil or political uncertainty. The World Gold Council describes this as one of gold's core characteristics: the metal is not tied to any single government's or company's creditworthiness, and it can be traded and held independently of the financial system.

This characteristic means the gold price can rise sharply during periods of acute uncertainty, for example during financial crises, armed conflicts or periods of significant political unpredictability, because investors seek assets that are not directly exposed to the financial system. This type of demand is, however, hard to predict, because it depends on events that are by definition unforeseen, and it can fade just as quickly as it appeared once uncertainty subsides.

Central banks around the world are among the largest participants in the gold market. According to the World Gold Council, central banks and official institutions together hold more than 38,000 tonnes of gold as part of their reserves, equivalent to roughly a quarter of all globally allocated reserve gold. When central banks increase their gold holdings, it adds to demand and can support the price, while a period of net selling by central banks can work in the opposite direction.

Danmarks Nationalbank holds a gold reserve of around 66.5 tonnes, which forms part of Denmark's foreign exchange reserve and exists primarily for historical and statutory reasons rather than as an active investment strategy. Nationalbanken states that gold makes up a smaller share of the total reserve, and that the krone value of the gold fluctuates with the gold price. Nationalbanken's gold is held in custody at institutions including the Bank of England and the Federal Reserve Bank of New York, and Nationalbanken publishes an ongoing list of its gold bars. Denmark's gold holding illustrates how gold has historically played a role in a country's financial contingency planning, even for a country with a fixed exchange rate policy.

Beyond investment demand, jewellery has historically been the largest consumption component of global gold demand, particularly in markets such as India and China, where gold carries significant cultural importance for weddings and festivals. When household incomes rise in these large markets, it typically has a positive effect on jewellery demand, while a weak economy or high prices can dampen consumer purchases of jewellery.

Gold is also used, to a lesser extent, in electronics and technology because of the metal's strong conductivity and resistance to corrosion, but this portion of demand is relatively small compared with jewellery and investment. Seasonal patterns, such as the Indian wedding season or Chinese New Year, can produce recurring but usually limited swings in physical demand and therefore in the price.

The gold market is one of the world's most liquid commodity markets. The World Gold Council has reported that a very substantial dollar value of gold trades hands daily, with London serving as a key trading hub for physical gold and exchanges such as COMEX in the United States and the Shanghai Futures Exchange serving as important markets for gold derivatives. This high liquidity means large investors, including central banks, can buy and sell significant quantities of gold without necessarily moving the price much in the short term, but it also means the price reacts quickly to new information, because many participants trade actively around the clock.

For an individual investor, it is useful to know that the gold price quoted in the media is typically the international spot price converted into a local currency, and that the price you actually pay or receive when buying or selling physical gold will differ from the spot price by a margin that covers the dealer's costs, storage and profit. This margin is not part of the price formation on the global market itself, but it is an important factor to be aware of when comparing offers from different dealers.

When investing in physical gold in Denmark, it is important to understand the VAT rules, since they have a significant effect on price. Under the Danish VAT Act, investment gold is exempt from VAT. Investment gold is defined as gold in the form of a bar or wafer with a weight above 1 gram and a fineness of at least 995 thousandths that are accepted by the gold markets, as well as gold coins with a fineness of at least 900 thousandths minted after the year 1800, which are or have been legal tender in their country of origin, and which are normally sold at a price not exceeding the market value of their gold content by more than 80 percent. Gold that does not meet these conditions, such as jewellery gold or bars below 995 fineness, is subject to standard VAT.

In practice, this means investors seeking VAT-free exposure to the gold price typically choose investment bars of at least 995 fineness or recognised gold coins meeting the fineness and age requirements. It is worth confirming with the dealer that a specific product meets the legal definition of investment gold before purchasing. As for taxation, the tax treatment of gains or losses on the sale of physical gold depends on individual circumstances, and it is advisable to seek specific guidance from the Danish Tax Agency or an accountant, as the rules for private individuals selling personal property such as gold can be complex and depend on whether the gold is considered a private acquisition or part of a more systematic investment activity.