What Causes the Price of Gold to Go Up and Down?

By Michael Ruger, CFP®
Partner and Chief Investment Officer at Greenbush Financial Group

Over the last few years, gold has experienced a significant rally, followed by periods of sharp volatility—including some recent price declines that have caught investors’ attention. As a result, we’ve been having more frequent conversations with clients about what actually causes gold prices to rise and fall, and whether a recent dip represents an opportunity or a warning sign.

In this article, we’re going to walk through the same conversations we’ve been having with clients and explain the major variables that impact the price of gold. Specifically, you’ll learn:

• Why gold is often viewed as a safe haven

• How the value of the U.S. dollar affects gold prices

• Why interest rates play a major role in gold movements

• Whether gold is a good long-term investment

• How gold compares to other commodities like silver, copper, and platinum

• How gold can fit into a diversified portfolio

Gold as a Safe Haven

Gold is often referred to as a “safe haven” asset. What that means is when there is volatility in the global economy—or sometimes in the U.S. stock market—investors may sell riskier assets like stocks and move money into gold in an attempt to protect their principal.

In certain periods in history, this strategy has worked well. When markets become unpredictable, gold can hold its value or even increase while stocks are falling.

However, investors need to be careful with the idea of gold as a safe haven. While gold is sometimes viewed as a “safer” asset than stocks, it is still a very volatile asset class. It is not unusual for gold to move more than 10% in a short period of time. That’s a big difference compared to bonds, which are also considered conservative investments but typically experience much smaller price swings over short time periods.

So while gold can sometimes be a successful safe haven during global volatility, investors must remember that gold itself can be volatile. It should be viewed as a portfolio diversifier, not a guaranteed protection strategy.

Inverse Relationship to the Value of the Dollar

Historically, gold has had an inverse relationship with the value of the U.S. dollar.

In simple terms:

• When the dollar goes down, gold tends to go up

• When the dollar goes up, gold tends to go down

Why does this happen?

If paper currency is losing value (purchasing power), investors often move money into physical assets like gold to preserve wealth. Gold is viewed as a store of value that cannot be printed or created like paper money.

On the flip side, when the dollar is strengthening and purchasing power is increasing, investors may feel less need to hold gold, which can lead to falling gold prices.

So historically speaking, movements in the dollar are one of the biggest drivers of gold prices.

Interest Rate Fluctuations

Interest rates are another major factor that influences gold prices, largely because of their relationship with the value of the dollar.

Typically:

• When the Federal Reserve lowers interest rates, the dollar often weakens, and gold may rise

• When the Federal Reserve raises interest rates, the dollar often strengthens, and gold may fall

One of the primary reasons attributed to gold's rapid appreciation over the last year was due to interest rates coming down, which weakened the dollar and pushed gold prices higher.

Looking forward, if inflation continues to cool and interest rates decline later into 2026 (outside of the recent Iran events), gold could recover much of what was lost in recent weeks. However, investors must also be aware of long-term inflation risks. If inflation rises again and the Federal Reserve is forced to increase interest rates, that could strengthen the dollar and become a major headwind for gold prices.

In many ways, rising interest rates can be one of the biggest enemies of gold.

Gold as a Long-Term Investment

When we look at long-term annualized returns, gold has not historically been a great long-term investment compared to stocks. Over 20- and 30-year periods, the S&P 500 has outperformed gold.

However, that does not mean gold has no place in a portfolio.

Gold can be useful for:

• Diversification

• Protection during market volatility

• Hedging against a declining dollar

• Hedging against certain inflationary environments

Gold tends to have lower correlation to stocks and bonds, which means it doesn’t always move in the same direction as traditional investments. Because of that, gold can be a useful component within a diversified portfolio, but investors should be cautious about allocating too much to gold due to its volatility and lower long-term expected returns compared to equities.

Gold Compared to Other Commodities

Clients will often ask: why gold instead of silver, platinum, or copper?

The main reason is predictability.

Gold is primarily viewed as a store of wealth. Its price is largely influenced by:

• The value of the dollar

• Interest rates

• Inflation

• Global uncertainty

• Central bank policies

However, other metals like silver, platinum, and copper have significant industrial uses. That means their prices are influenced not just by currency and global events, but also by:

• Manufacturing demand

• Technology demand

• Construction activity

• Supply chain issues

More variables typically mean more unpredictable price movements.

There are years when gold performs very well and other metals do not, and there are also years where metals like copper or silver outperform gold. In investment management, we often give extra weight to assets that are easier to analyze and understand.

Special Disclosure

This article is meant to educate investors on the price fluctuations in gold based on our experience in investment management over the past number of years. This is not a recommendation to buy or sell gold or any other commodity. Every investor’s situation is different, and decisions should be made based on your individual financial plan, time horizon, and risk tolerance.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Frequently Asked Questions About Gold

1. Why does gold go up when the market goes down?
   Gold is often viewed as a safe haven, so investors sometimes move money into gold during stock market volatility.
2. What is the biggest factor that affects gold prices?
   The value of the U.S. dollar and interest rates are two of the biggest drivers of gold prices.
3. Does gold go up when inflation rises?
   Often it does, because gold is viewed as a store of value when purchasing power declines.
4. Why does gold fall when interest rates rise?
   Rising interest rates typically strengthen the dollar, which historically puts downward pressure on gold.
5. Is gold a good long-term investment?
   Historically, stocks have outperformed gold over long periods, but gold can still be useful for diversification.
6. Is gold safer than stocks?
   Not necessarily, gold is still a very volatile asset class.
7. Why not invest in silver or copper instead of gold?
   Those metals have industrial uses, which makes their prices more unpredictable compared to gold.
8. How much gold should be in a portfolio?
   It depends on the investor, but many diversified portfolios only allocate a small percentage to gold (under 15%).
9. What causes gold to drop quickly?
   A rising dollar, rising interest rates, or reduced global uncertainty can all cause gold prices to fall.
10. Is a drop in gold a buying opportunity?
    It depends on the reason for the drop. Investors should look at interest rates, the dollar, and global conditions before making a decision.