What Causes the Price of Gold Stocks to Fluctuate?

By: John Csiszar | Reviewed by: Ashley Donohoe, MBA | Updated March 13, 2019

Gold is used in everything from jewelry and coinage to electronics, it seems like gold will always be in demand. However, it can be hard for the average investor to directly own gold. This is where gold stocks come in. There are different types of gold stocks, but they all fluctuate, at least indirectly, based on the gold price per ounce.

Gold Price Depends on Which Factors?

Gold is a commodity, meaning it is a raw material used primarily in the production of other goods. As it is relatively rare, investors also prize it, in the form of raw gold bullion and coinage. But supply and demand is only part of the story when it comes to the price of gold.

One of the main factors in the price of gold is the cost of production, since gold is a metal that must be mined, processed and refined before it can be used. This is an extensive process that requires heavy machinery, skilled laborers and advanced geological techniques. As the years go by, it becomes harder and more expensive for gold to be mined because the easiest-to-access gold deposits have already been reached. When gold becomes expensive to mine, the price goes higher.

Interest rates are another factor affecting gold prices. Generally speaking, when interest rates rise, gold prices suffer. This is mainly because gold doesn't pay any interest or dividends, making interest-bearing investments more attractive. However, rising interest rates also increase the production cost of gold, which can help support the price.

The rise and fall of the U.S. dollar also affect the value of gold, since gold is denominated in dollars. When the U.S. dollar is strong, it makes gold more expensive for investors and governments of other countries who purchase gold using their own currencies; this can make the price of gold fall. Similarly, if the U.S. dollar falls in value, gold becomes more inexpensive for purchasers using foreign currencies, and this can help push the price of gold up.

When Does Gold Price Increase?

From an investment perspective, gold is known as a diversifier. It doesn't trade in tandem with U.S. stocks. Often, the two trade with a negative correlation, meaning when U.S. stock prices go up, gold prices fall, and vice versa.

Gold is often cited as an inflation hedge as well. However, rising inflation isn't necessarily a determinant of higher gold prices. It's more likely that the deteriorating economic growth often triggered by rising inflation – with a corresponding drop in U.S. stock prices – contribute to rising fear in the marketplace, with investors flocking to gold.

Gold also increases in value sometimes simply due to momentum. When investors start piling into gold, the price can start rising rapidly, which attracts other investors afraid to miss out on a rapidly rising price. This was epitomized during the gold craze of the late 1970s and early 1980s when gold prices skyrocketed to levels they wouldn't see again for another 25 years.

Types of Gold Stocks

Investors interested in simply tracking the price of gold can invest in a gold exchange-traded fund such as the gold-tracking SPDR Gold Shares ETF, stock symbol GLD, issued by State Street Advisors. This ETF (exchange-traded fund) will follow the rise and fall of the underlying gold bullion price, less fund expenses. Even with an annual expense ratio of 0.40 percent as of 2019, this ETF can be a less expensive option for investors to track gold than owning and storing their own gold bars.

Other gold-tracking ETFs are available, including the iShares COMEX Gold Trust ETF (IAU) and the PowerShares DB Gold ETF (DGL).

Beyond the gold-tracking ETFs, investors can purchase individual stocks of gold mining companies. These stocks represent ownership in the gold mining companies that actually extract the metal from the ground. Popular gold mining companies include Barrick Gold (GOLD), Freeport-McMoRan (FCX), Goldcorp (GG) and Newmont Mining (NEM). As with any company's stock, the financials and specific business focuses of each of these companies vary, so investors should perform due diligence or speak with a financial advisor before purchasing any shares.

Gold Stocks and Gold Prices

It's easy to predict what the share prices of the gold-tracking ETFs will do, as they simply mirror the daily price of gold. Fund expenses notwithstanding, you'll get an almost identical return out of your gold-tracking ETFs as you would if you were holding actual gold bullion at the daily spot price. Prices of gold mining stocks tend to trade up and down in tandem with gold prices. However, when you own the stock of a gold mining company, you'll have to factor in the financial performance and specific company news tied to the stock you select.

For example, if gold prices move higher, more profits are generated for all of the gold miners, as they are all receiving a higher price for the same amount of effort and expense. But if one company has higher extraction and production costs one quarter than the other company's, that can trim their profits, resulting in a share price that doesn't move as high as others.

Other factors may affect the profits and perception of individual gold mining stocks as well. For example, some miners may move higher or lower based on the economic conditions of the areas in which they operate, which differ from company to company.

Gold Price Per Ounce

Federal Reserve economic data records going back to 1968 show that historic gold prices generally remained flat over long periods of time, punctuated by tremendous spikes. For example, from 1968 until 1974, the price of gold per ounce spiked from about $35 to $187.50.

The price trended relatively flat from then until it spiked up to $668 in January of 1980. The price didn't exceed this high until September of 2007, when it began another spike up to $1,826 by the end of August 2011. Since then, the price of gold per ounce has traded in a range between about $1,000 and $1,400. As of March 2019, the price of gold stood at about $1,300 per ounce.

Investing in Gold

Many financial experts recommend using gold as a way to diversify a balanced portfolio. Although it can be hard to pinpoint the direction that gold prices will go, historically, gold has not had a strong correlation with general stock market prices.

Correlation ranges from +1 to zero to -1. If two assets have a +1 correlation, it means they move in lockstep, while a correlation of -1 means two assets move in the exact opposite direction. A correlation of zero indicates no relationship in asset price movements at all.

Owning uncorrelated assets means that when part of your portfolio goes up in value, part of it goes down, and vice versa. Over time, this can smooth out the highs and lows of your portfolio. Regardless of your belief in gold as an individual asset, as it has a low correlation with stock prices, owning a bit of gold in your equity portfolio can help reduce your overall volatility.

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About the Author

John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.

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