74.80 % of retail investors lose their capital when trading CFDs with this provider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74.80 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What determines the gold exchange rate?

Published: 26.06.2023

The gold price is quoted in dollars per troy ounce and is monitored by traders, investors, and analysts for various reasons. In today's article, we will discuss what market indicators shape the gold price and how to spot it on a chart.

Traditionally, it has been stated that the price of gold tends to rise when inflation is high and fall when inflation is low. However, the relationship between gold and inflation is much more intricate due to the numerous factors that influence the price of this global commodity. Understanding these factors is essential as they play a complex role in determining the resulting price of this precious metal. Furthermore, some of these factors have the potential to provide insights into the short-term future development of the gold price.

Which market factors determine the gold price?

The main macroeconomic factors that determine the development of the gold price on global markets include:

  • Global geopolitical events (risk off/on sentiment)

  • US dollar, interest rates, inflation

  • Central banks

Factor 1: Global geopolitical events - risk off / risk on sentiment

The global events of the Coronavirus pandemic and the invasion of Ukraine have had a profound impact on the world markets, creating widespread uncertainty and risk-off sentiment. However, intriguingly, the behavior of the gold exchange rate defied expectations in both cases. When the announcement of the Covid-19 pandemic was made, gold experienced a notable and sustained upward trajectory on the chart. Conversely, following Russia's invasion of Ukraine, gold initially exhibited a rise in the first two weeks after the conflict commenced, but subsequently weakened. This contrasting pattern can be clearly observed when examining the gold chart below.

The impact of the covid-19 pandemic and the invasion of Ukraine on the gold price
The impact of the covid-19 pandemic and the invasion of Ukraine on the gold price

The relationship between the gold price and global geopolitical events yields a more ambiguous conclusion. While uncertainty in the markets can occasionally drive an appreciation in the gold price, extreme risk aversion characterized by strong risk-off sentiment can actually weaken it. This is due to the fact that during periods of uncertainty, investors typically seek refuge in safe havens.

Historically, US government bonds have served as the preferred safe haven over gold. Unlike gold, these bonds provide investors with a return in the form of interest. Gold, being a non-yielding asset, does not offer a fixed return, thus impacting its attractiveness during risk-off episodes.

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Factor 2: US dollar, interest rates and inflation

The gold exchange rate, quoted in US dollars per troy ounce, exhibits an evident inverse relationship with the value of the US dollar. When the US dollar weakens, gold tends to appreciate, whereas a strengthening US dollar often leads to a decline in the price of gold. This relationship is clearly visible when analyzing the chart below, where gold is depicted in the top window and the USD index is displayed in the bottom window. The weekly chart provides a visual representation of this inverse correlation between gold and the US dollar.

Gold and USD index on weekly chart
Gold and USD index on weekly chart

Following the Federal Reserve's decision to cut interest rates to 0.25% in March 2020 as a response to the impact of the Covid-19 pandemic, gold experienced a notable and robust appreciation, coinciding with a weakening US dollar. Subsequently, gold entered a phase of stability, exhibiting a relatively sideways trend. Adding to this observation, it is noteworthy that the loose monetary policy implemented by the Federal Reserve contributed to a rapid increase in inflation within the United States from April 13, 2021, to July 13, 2022.

In response to the increasing inflationary pressures, the Federal Reserve took decisive action in early 2022 by rapidly raising interest rates to curb price growth. The rate hikes commenced on March 16, 2022. Interestingly, during the initial stages of the rate hikes, inflation continued to rise, while the price of gold weakened. Concurrently, the US dollar appreciated as the demand for US Treasuries, offering higher interest rates, surged.

However, the dynamics shifted on July 13, 2022, as inflation began to decline. Despite the presence of a strong dollar, gold's depreciation persisted for a certain period. It was only in October 2022 that gold initiated a strengthening trend, coinciding with a significant weakening of the US dollar, while inflation continued its downward trajectory.


Gold's efficacy as an inflation hedge in the medium term is limited, making it essential to focus on the actions of the Federal Reserve and their impact on the currency to gain valuable insights into the potential evolution of gold prices.


Factor 3: Central banks

Central banks play a significant role in influencing the price of gold. During periods of robust economic growth and substantial foreign exchange reserves, central banks may seek to decrease their gold holdings. This is because gold, unlike bonds or deposits, does not generate any return, exerting downward pressure on its price.

Regarding Russia potentially selling its gold reserves to raise funds amidst financial pressures, it could impact the gold price. According to the World Bank, such a scenario could potentially drive the price of gold down to approximately USD 1,400 per ounce by 2030.

Conversely, the BRICS community is contemplating the introduction of a gold-backed currency. With sufficient gold reserves, if countries were compelled to pay for commodities in this gold-backed currency, it could compete with the US dollar. This could potentially lead to a depreciation of the US dollar while driving the price of gold higher.


In conclusion, the price of gold is subject to the influence of numerous factors, as outlined in this article. Gold is a complex asset, making long-term price prediction nearly impossible. However, in the short term, certain patterns can be identified to assist traders in their speculations. The primary driver of gold price dynamics lies in the actions of the US Federal Reserve and the value of the US dollar, highlighting their fundamental significance in shaping gold's trajectory.

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Key terms

Commodity currencies
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These include the Canadian dollar (CAD), Australian dollar (AUD), New Zealand dollar (NZD). The value of these currencies is influenced by the value of the commodities that the countries produce. For example, CAD is influenced by the price of oil, AUD by the price of gold, iron ore and coal, and NZD by the price of dairy production.
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The Fed is the central bank of the United States of America. The Fed's decisions not only have an impact on the US dollar, but often also on other currencies or commodities and stock indices. For this reason, the Fed's decisions are very closely watched by Forex traders.
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A trading technique which consists of opening positions on the same instrument in opposite directions in order to lower or annulate required margin (“position netting” occurs) and to ensure present market exposition. For example, if a trading position of 1 lot BUY is open on EURUSD, then after opening a 1 lot SELL on EURUSD an annulation of required margin occurs and profit from these open positions will be fluctuating only in terms of  spread changes on EURUSD.
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A situation in the economy where prices are rising, reducing the purchasing power of consumers. It is a very important indicator for central banks. If inflation is low, it can be a signal to lower interest rates. If inflation is high, the central bank is likely to raise the interest rate.
Interest rate
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The most important indicator for fundamental analysis. Interest rates are set by central banks. A decrease in the interest rate can mean a weakening of the domestic currency and conversely an increase in the interest rate can lead to a strengthening of the currency.
Risk management
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Risk management means the implementation of rules to ensure control of the account in the event of adverse events. Examples of these events include a change in interest rates, a change in the exchange rate of a currency pair, a lack of liquidity. Risk management tools include such things as a trading plan, the use of stop losses, setting a maximum amount a trader risks in a trade, etc.
Sentiment analysis
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Market sentiment deals with the emotions and psychology of market participants. Market sentiment analysis shows whether traders have a desire to sell or buy.
74.80 % of retail investors lose their capital when trading CFDs with this provider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 74.80 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.