What drives gold prices more: Supply or demand?

Gold investing has become increasingly popular in recent years. In 2024, we saw the price of gold surpass $2,700 per ounce as central banks stockpiled reserves and investors sought safety from market volatility. Whether you're new to investing or prioritizing portfolio diversification, understanding what drives gold prices could help you better decide when — and how much — to invest in this precious metal.

To understand whether supply or demand plays a bigger role, we spoke with experts who are well-versed with the gold market. Below, we uncover the main factors that could affect your investment decisions.

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What drives gold prices more: Supply or demand?

"Changes in demand tend to move gold prices more dramatically than changes in supply," explains Daniel Boston, founder of Preserve Gold. He says gold mining production has grown just 9% over the past decade, making supply relatively stable.

Kevin Shahnazari, founder of FinlyWealth, highlights demand's immediate impact on gold's value. "When central banks announced major gold purchases last year, I watched prices jump within hours," he says. "Supply changes, [such as] mine openings or closures, typically take months to affect prices."

How supply and demand each impact gold prices

Understanding how gold prices move means looking at both short-term and long-term factors. Ben Nadelstein, head of content at Monetary Metals, explains that gold is unique because its existing supply is vast compared to new mining output. This means quick price changes usually come from shifts in how people and institutions buy gold, while supply changes play out over longer periods.

Gold supply factors to watch for

Mining supply may not drive day-to-day price swings, but it plays a role in gold's long-term value, according to Boston. Historically, changes in mining supply have influenced price trends. Here are the major supply factors that shape gold prices:

• Mining production: When gold miniding falls, it creates a supply constraint that helps support prices. The total supply has stayed flat since 2003, suggesting this trend may continue.
• Production costs: Rising mining costs set a natural price floor for gold. In early 2024, mines needed about $1,212 per ounce just to break even, which helped establish a minimum market price for profitability.
• Supply inelasticity: Unlike many commodities, gold supply doesn't quickly respond to price changes. This means when demand surges, there isn't a flood of new supply to drive prices back down — helping maintain gold's value.

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Gold demand factors to watch for

Demand's impact on gold prices can be sudden and dramatic, causing major swings in a short amount of time. When forecasting gold price movements, watch these three demand factors closely:

• Investment flows: ETF investments hit a turning point in Q3 of 2024, with inflows reaching 95 tonnes and doubling year-over-year demand to 364 tonnes. Boston notes the "FOMO factor" has been a key driver for investors to buy into price momentum and consideration of gold's safe-haven role.
• Central bank buying: "Central bank buying patterns tell us where big money is moving," says Shahnazari. When multiple central banks increase reserves simultaneously, it often signals sustained upward pressure on prices.
• Economic uncertainty: To gauge this, Nadelstein tracks three triggers — stock market volatility, currency value changes and inflation rates. When these metrics deviate from normal levels, gold prices often follow. For instance, gold prices typically go up when inflation spikes. Market volatility due to poor employment data coming out may also cause a short-term gold price rise.

What this means for your investment decisions

Knowing how supply and demand affect gold prices can help you make smarter investment choices. Timing the market perfectly isn't necessary or realistic, however. And with gold prices still below historical inflation-adjusted highs, many experts see room for growth.

"Gold is always available at the right price," emphasizes Nadelstein. He suggests watching demand signals such as inflation expectations and geopolitical risks when planning purchases.

Preserve Gold's Boston recommends a measured approach. Instead of trying to predict price swings, he advocates for dollar-cost-averaging — investing fixed amounts regularly regardless of price. For example, you might invest the same amount monthly in a gold ETF or buy gold bars quarterly. This strategy lets you benefit from gold's long-term trends while avoiding the risks of mistiming market moves.

The bottom line

While demand factors including ETF flows and central bank buying drive short-term price moves, supply trends shape gold's long-term value. Boston suggests watching both sides but reminds us that no single indicator tells the whole story.

Before you invest in gold, share your financial goals and risk tolerance level with a trusted advisor. They can then help you choose the right approach — whether that's buying physical gold, investing in ETFs or exploring other gold assets. Most importantly, work with reputable dealers offering transparent pricing and clear explanations of all associated costs.