Why does the gold price rise or fall? The influence of interest rates, inflation, and geopolitics

Why does the gold price fall or decline?

The gold price can fall when real interest rates rise, the dollar strengthens, uncertainty wanes, or investors take profits following a previous rally. A price decline rarely has a single cause.

Financial markets continuously price in shifting expectations regarding interest rates, inflation, economic growth, and politics. Investor positioning also plays a role: if many participants are already positioned for a rally, relatively minor news can be enough to trigger profit-taking.

Therefore, a falling gold price does not automatically mean a fundamental driver has disappeared; sometimes it is primarily market expectations that shift, while the underlying reality remains largely unchanged.

The influence of interest rates and central banks on the gold price

Of all economic factors affecting the price of precious metals, the interest rate is perhaps the most dominant. The interest rate policy of central banks, and specifically that of the US Federal Reserve (the Fed), acts as the thermostat of the global economy.

To understand why the gold price falls or rises after an interest rate decision, we must look at the concept of 'opportunity cost' and the interaction with the dollar.

Gold pays no dividend or interest

The fundamental difference between gold and other asset classes is that gold generates no cash flow.

• Those who own stocks often receive dividends.
• Those who own government bonds receive coupon interest.
• Those who have savings in the bank receive interest.
• Those who own physical gold possess an asset with no counterparty risk, but receive no periodic payout.

This difference forms the core of price formation. We call this the opportunity cost: the cost of missing out on income elsewhere.

The effect of a rising interest rate

When central banks raise the policy rate, the return on 'safe' government bonds and savings accounts increases. For large institutional investors, it becomes more attractive at that moment to park capital in bonds rather than in gold. After all, you receive a guaranteed return of, for example, 4% or 5%.

Holding gold becomes relatively 'more expensive' because you miss out on that interest. Historically, we therefore often see the gold price under pressure during periods of aggressive interest rate hikes.

The effect of a low or falling interest rate

When the interest rate is close to zero (or even negative), the advantage of bonds and savings disappears. The opportunity cost of gold is then negligible. In such a climate, investors are quicker to choose gold because of the potential for price appreciation and wealth protection, since the alternative (money in the bank) yields nothing.

When interest rates fall, the opportunity cost of holding gold typically decreases. Even then, gold does not automatically benefit. A rate cut driven by rapidly falling inflation or restored confidence plays out differently than a rate cut during a crisis. You can read about the specific European context in our article on the impact of ECB interest rates on precious metals.

Why the real interest rate matters

The real interest rate shows the return that remains after adjusting for inflation, and is therefore often more relevant for gold than nominal interest rates alone. In simplified terms: real interest rate = nominal interest rate − inflation. At 4% interest and 2% inflation, the real interest rate is 2%; at 3% interest and 4% inflation, it is negative.

Moreover, markets are forward-looking, meaning expectations of future interest rates and inflation often carry more weight than the most recent figures. The relationship between gold and the real interest rate is historically evident, but not immutable: according to the World Gold Council, this traditional dynamic has been frequently decoupled since 2022 by factors such as central bank buying.

The power of the Federal Reserve (Fed)

The American central bank has a disproportionately large influence on the gold market. This is because gold is traded internationally in dollars. An interest rate hike by the Fed often makes the dollar stronger (foreign investors buy dollars to benefit from the high US interest rate).

A stronger dollar makes gold directly more expensive for anyone paying with other currencies (like us with the euro), which can dampen demand. Therefore, gold investors watch the speeches of the Fed Chair closely.

Often, the gold price reacts to the expectation of policy:

• Does the Fed hint at interest rate cuts? Then the gold price often runs ahead of the facts and rises.
• Is there unexpected news that rates must remain high for longer ("hawkish" policy)? Then the gold price can correct suddenly.

Gold primarily protects against long-term inflation and loss of purchasing power

What influence does the US dollar have on the gold price?

The gold price and the dollar often move in opposite directions, but that relationship is not absolute. The international gold price is typically denominated in dollars per troy ounce. When the dollar strengthens, buyers using euros need more of their own currency for the same amount of gold, which can dampen international demand. Furthermore, a stronger dollar often coincides with higher US interest rates, allowing the currency effect and higher opportunity costs to reinforce each other.

The standard: XAU/USD

On international futures markets (such as the COMEX in New York and the LBMA in London), gold is traded and settled in US dollars. The symbol for gold is XAU and the currency is USD. This means that the value of gold is inextricably linked to the strength (or weakness) of the American currency.

The inverse relationship (negative correlation)

As a rule, we see a negative correlation: if the dollar moves up, gold moves down, and vice versa. This phenomenon is driven by two main factors:

1. Purchasing power for international investors: Because gold is quoted in dollars, the precious metal becomes more expensive for investors paying with other currencies (such as the euro, yen, or yuan) as soon as the dollar rises in value. You simply need more euros to buy those same expensive dollars with which you settle the gold. This curbs global demand, which suppresses the price.
2. Competition as a safe haven: Both gold and the dollar are seen as 'safe havens' in times of stress. If the US economy is flourishing and the dollar strengthens, investors have less need for the protection of gold.

What does this mean for the European investor?

As a client of The Silver Mountain, you buy your gold in euros. This adds an extra dimension to your investment: the exchange rate between the euro and the dollar (EUR/USD).

This currency effect often works in your favor and dampens volatility, an effect we also call the 'natural currency hedge':

• Scenario: The gold price falls in dollars.
  Often this happens because the dollar becomes very strong. But if the dollar is strong, it usually means the euro weakens. You get fewer dollars for your euro.
  Result: Although the gold price on the boards in New York falls, you notice less of this in the Netherlands. The gold price in euros falls less hard (or even rises) because the weak euro compensates for the drop in dollars.
• Scenario: The gold price rises in dollars.
  This often happens when the dollar weakens. A weak dollar usually means a stronger euro.
  Result: The gold price in euros rises, but possibly slightly less hard than in dollars, because your euros have become worth more relative to the dollar.

Exceptions: when the correlation breaks

There are rare moments when gold and the dollar rise simultaneously. We often see this during acute crisis situations or extreme geopolitical tensions.

At such a moment, there is so much fear globally that investors sell everything (stocks, bonds, commodities) to be as liquid as possible. They then flee to the two most liquid and safe markets in the world: the US dollar (cash) and gold.

In this scenario, the dollar acts as the safest means of payment and gold as the ultimate store of value.

Gold as protection against inflation

Inflation is often called the 'silent killer of wealth'. It is the process by which your money slowly loses its value; for the same euro, you can buy less in a few years than today.

For centuries, gold has been known as the ultimate hedge (protection) against this phenomenon. But how exactly does this mechanism work, and is gold always perfect protection?

Scarcity versus the printing press

The primary reason gold protects against inflation lies in its natural scarcity. Central banks, like the ECB and the Fed, have the power to print unlimited money ('fiat money'). Since the financial crisis and the corona pandemic, the money supply in the system has increased explosively.

When more money comes into circulation for the same amount of goods and services, prices rise. Your savings are diluted.

Physical gold, on the other hand, cannot be printed. The annual addition of gold through mining is very stable and limited (about 1.5% to 2% per year).

Because the amount of gold remains relatively constant while the mountain of paper money grows, the price of gold rises when expressed in that paper money. You simply need more and more euros to buy that same unique amount of gold.

Preservation of purchasing power in the long term

It is important to distinguish between price and purchasing power. Investors often look at the daily price, but the real power of gold is the preservation of purchasing power.

A classic example illustrates this perfectly:

• In the time of the Roman Empire, you bought a luxury toga, a belt, and sandals (a tailored suit of that time) for 1 ounce of gold.
• In the 1920s, you bought a good tailored suit for 1 ounce of gold.
• Today, for the equivalent of 1 ounce of gold (approx. €2,500), you can still buy a luxury tailored suit.

The currency has changed or even completely disappeared over those thousands of years, but the exchange value of the gold has remained the same. Gold does not necessarily make you 'richer' in goods, but it prevents you from becoming poorer due to inflation.

The nuance: short versus long term

Yet there is a nuance that is often overlooked. Gold is a perfect inflation protector in the long term, but it does not always react 1-to-1 to inflation figures from month to month.

Sometimes inflation is high, but the gold price drops temporarily anyway. This is often due to the intervention of central banks (see point 1: interest rates). If inflation rises, central banks raise interest rates to cool down the economy. That higher interest rate can temporarily depress the gold price, despite high inflation.

Only when it becomes clear that inflation is structural ('sticky') and does not simply go away with an interest rate hike, or when the real interest rate remains negative, do we see gold catching up.

What does stagflation mean for gold?

Stagflation can create a supportive environment for gold, but it does not mean the price will automatically rise or always outperform other investments. Stagflation combines persistent inflation with weak economic growth. Central banks then face a dilemma, as higher interest rates curb inflation but weaken the economy, while accommodative policy supports growth but fuels inflation.

In such an environment, gold can attract interest because the purchasing power of money is under pressure, uncertainty rises, and the expected real interest rate can remain low or negative. However, the ultimate reaction depends on interest rates, the dollar, market positioning, and the severity of the slowdown.

Geopolitics: the effect on the gold price

Geopolitical uncertainty can increase demand for gold, but the magnitude and duration of the price response depend on the economic consequences. Wars, trade conflicts, sanctions, and election uncertainty can erode confidence in financial markets, prompting some investors to seek liquid or tangible assets.

Gold can attract more interest as a result, because it carries no counterparty debt and cannot go bankrupt.

Yet not every conflict leads to a lasting price increase. If the event was already anticipated, or if the economic consequences remain limited, an initial risk premium can quickly dissipate. Geopolitics also has an indirect impact through energy prices, inflation, interest rates, and the dollar. Higher oil and gas prices can drive up inflation expectations, while a flight to the dollar can temporarily pressure gold in dollar terms.

We discuss a timely example of this interplay in our news article on the gold price, geopolitical tensions, and oil fears.

The mechanism: why gold during crises?

To understand why gold rises when war threatens, you must look at what gold is not.

• Gold is not someone else's debt.
• Gold cannot go bankrupt.
• Gold is not dependent on the promises of a government or financial institution.

In times of peace and prosperity, investors settle for 'paper promises' (stocks, bonds). But as soon as a conflict breaks out, fear arises that those promises cannot be kept, that borders will close, or that currencies will collapse.

Capital then flees in a so-called flight to safety to tangible assets with no counterparty risk.

The impact of conflicts: short versus long term

The effect of geopolitics on the gold price is often twofold.

• The shock reaction (short term): Immediately after the news of an invasion, a terrorist attack, or an escalation in the Middle East, we often see a vertical price increase. This is the 'fear premium'. Investors buy gold blindly as insurance. Note: These peaks are sometimes short-lived. As soon as the situation stabilizes (even if the conflict is not yet over), the extreme fear subsides, and the price can correct again.
• Structural consequences (long term): Geopolitical conflicts often have long-lasting economic consequences. Think of sanctions, trade wars, or the blowing up of energy supplies. This leads to structural inflation and disrupted supply chains. In this scenario, the gold price remains high for a long time, not only due to fear but because the economic fundamentals have deteriorated.

The new trend: central banks and de-dollarization

A very important development in the current geopolitical arena is the behavior of central banks themselves, particularly in the East (such as China, Poland, Turkey, and India).

Since the Western sanctions against Russia, where foreign exchange reserves were frozen, many countries have been shaken awake. The realization has grown that foreign exchange reserves in dollars or euros are politically vulnerable. "If you don't hold it, you don't own it."

In response, central banks are now buying physical gold at a record pace. Gold is neutral, politically unaligned, and accepted worldwide. These massive purchases by states place a solid floor under the gold price.

This is not a temporary hype, but a structural shift in the global financial system where gold is regaining a more prominent role as an independent reserve.

Elections and political instability

Not only wars, but also domestic politics in superpowers like the US influence the price. Markets hate uncertainty. When elections approach and the outcome is uncertain, or when candidates propose policies that will cause the national debt to explode, investors seek cover in gold.

Geopolitical uncertainty increases the demand for gold as a 'safe haven'.

The interplay at a glance

No single development works in only one direction; whether something turns out to be favorable or unfavorable depends on other factors and on market expectations. The table below illustrates this interplay and helps prevent relying on universal rules.

Which indicators can you track?

To better understand movements in the gold price, it is best to monitor multiple indicators simultaneously rather than focusing on a single figure.

These indicators provide context, not a reliable short-term forecast. For concrete scenarios, you can read further in our gold price outlook and our analysis of the potential gold price trajectory toward 2030.

Physical gold within a wealth strategy

Physical gold can serve for diversification and direct ownership; the role it deserves depends on your goals, risk tolerance, and investment horizon. The Silver Mountain has specialized in physical precious metals since 2008 and is registered with the AFM (license number 12048860) for offering investment objects. We operate with diligence and transparency, from your initial purchase to any subsequent sale.

You purchase gold and silver from us at live market prices, with delivery via our dedicated delivery service or collection by appointment in Baarn and The Hague. If you prefer secure storage, this is available on a fully allocated basis in your name via Edelmetaal Beheer Nederland, and with repurchase assurance via sister company Inkoop Edelmetaal, you can easily sell your gold back to us at a later date.

Those wishing to explore further can browse our physical gold range or compare popular 1 troy ounce gold coins.

Conclusion: interest rates, inflation, and geopolitics never operate in isolation

The gold price is determined by the interplay between real interest rates, inflation expectations, the dollar, geopolitical risks, and the behavior of market participants. Higher interest rates can put pressure on gold, but not when inflation accelerates even faster or uncertainty increases. Geopolitics can stimulate safe-haven demand, but also drive a stronger dollar or a need for cash liquidity. As a result, gold sometimes falls on news that seems favorable at first glance.

These factors help to understand price movements in their proper context, but do not make an accurate prediction possible. Anyone considering physical gold should therefore look beyond today's headlines and focus primarily on the intended investment horizon, diversification, costs, and the preferred form of ownership.

At The Silver Mountain, we guide investors who want to consciously use gold as part of a well-considered wealth strategy.