6 Reasons Gold Prices Drop and What They Mean for Investors [November 2024]

If there’s one truth about investments, it’s this: nothing is certain. Whether you’re investing in stocks, real estate, or precious metals such as gold, prices fluctuate and no one can guarantee a specific return to investors.

We do know the factors that affect gold prices. Gold tends to hold its value over the long term, but in the short term, its price may go up and down depending on political, economic, and industrial factors. The most recent gold price drop occurred in October 2024, but that is far from the only example of how prices ebb and flow. Here’s what to know.

6 reasons gold prices drop 

Although no one can guarantee with certainty when and how the value of gold will change, six factors have historically been linked to drops in the price of gold:

1. Interest rates rise
2. Inflation falls
3. The dollar weakens
4. Demand drops
5. Supply increases
6. Political and economic tensions subside

Let’s take a closer look at each one.

1. Interest rates rise

Interest rates and gold have what is known as an inverse relationship. Typically, when interest rates rise, the price of gold falls. When interest rates fall, gold prices may rise.

This is because when interest rates are high, investors may prefer investing their money into interest-earning assets rather than gold, which doesn’t pay interest. As a result, less gold may be purchased during high-interest periods, which lowers demand and, in turn, prices.

Example

Gold hit a record high in September 2024 after the Federal Reserve announced a 0.5% decrease in the federal funds interest rate. Prices then dipped 1.1% in October when it was learned that the next interest rate cut likely wouldn’t be as high as expected.

Future outlook

Interest rates are expected to continue to fall in the next two years. The Conference Board, a think tank, anticipates that the federal funds rate will drop from its current target of 4.75% to 5% to 3% to 3.25% in 2025. By 2026, rates could dip from 2.75% to 3%. All that means that higher gold prices might be here to stay.

2. Inflation falls

Gold is often used as a hedge against inflation, meaning it holds its value even during inflationary periods. When inflation is high, people may be more likely to buy gold, increasing its value. When inflation drops, so too may demand for gold.

However, the link between gold prices and inflation may be outweighed by other factors. For instance, despite negative inflation in 2009, gold prices rose. That may be due to the effects of the Great Recession in that year.

Example

You’ll need to look back to 1980 to see the best example of how gold prices grow during high inflation. From September 1978 to January 1980, the price of gold rose 285% as inflation climbed from 6.84% in 1978 to nearly 14% in 1980. When inflation fell after that, the price of gold dropped as well.

Future outlook

As of September 2024, inflation was 2.4%, down significantly from the 8% average of 2022. The Federal Reserve targets an inflation rate of 2%, and economists see it hitting that level in 2025. That could mean gold prices moderate or fall, but that may depend on other aspects of the economy.

3. The dollar weakens

Traditionally, there has been a negative relationship between the strength of the dollar and the value of gold. In other words, when the U.S. dollar is strong, the value of gold goes down. But when it is weak, gold prices increase.

This may be because when the dollar is strong, that is where investors want their money. However, when the dollar weakens, they look for alternative places to keep their wealth.

Example

The 1980s is a good example of how a strengthening dollar can lower the price of gold. From 1980 to 1985, the dollar’s value appreciated by 77%. During that same time, the value of gold dropped in four out of five years.

Future outlook

As of October 2024, the dollar is trading at 10% to 15% above its fair value, which may be expected to drop. As a result, J.P. Morgan says, “Looking ahead, we think the dollar environment should be relatively supportive for gold prices.”

4. Demand drops

Gold—like any other product or service—is subject to the economic principle of supply and demand. The higher the demand, the higher the price. If demand should drop and fewer people buy gold, then it can be expected that gold prices may drop too.

Example

In the fourth quarter of 2021, gold demand dropped to an 11-year low. Thanks to reduced demand for jewelry and central bank buying, demand was down 28% year-over-year. During that same year, the price of gold dropped from $1,898 per ounce in May to $1,749 per ounce in September.  

Future outlook

The 2021 decrease in demand for gold didn’t last long. As of the third quarter of 2024, demand for gold has seen a 35% annual increase and exceeded $100 billion for the first time. Given predictions for record-high gold prices in 2025, that demand isn’t expected to decrease.

5. Supply increases

The supply of gold is an often overlooked factor in prices, according to an analysis by CME Group, a derivatives marketplace. The group notes three factors affect the availability of gold on the market:

1. Mining supply
2. Secondary supply—the sale of previously mined gold
3. Official transactions by central banks

If supplies are limited—either because of lower mining activity or fewer people selling the gold they own—prices can be expected to go up.

Example

Excess supply may have contributed to the dropping gold prices of the 1990s. Gold mining activity increased from 34 million troy ounces annually in 1980 to 85 million troy ounces in 1999. The 1990s also saw many central banks selling off portions of their gold reserves, which helped increase supply and depress prices.

Future outlook

Next year might see more gold on the market, given that mining was up 6% year-over-year as of the third quarter of 2024. However, that could be offset by purchases from industrial and investment buyers. Demand from investors alone was up 132% in the third quarter of 2024. All that demand could mean a decrease in available supply.

Moreover, central banks also hold approximately 20% of their foreign exchange reserves in gold. These entities have ramped up gold purchases in recent years and show no signs of slowing, according to a Goldman Sachs analysis.

“Goldman Sachs Research expects the buying spree to persist amid concerns about U.S. financial sanctions and the growing US sovereign debt burden,” the analysis notes. That could limit the supply available to individual investors and help keep gold prices high.

6. Political and economic tensions subside

The political and economic state of the world often affects gold prices, although it may be more difficult to quantify. During times of uncertainty, investors often turn to gold as a safe haven. 

That may have helped fuel the record gold prices of 2024—international conflicts in Ukraine and the Middle East, combined with the uncertainty of the U.S. presidential election, may have led to an uptick in gold sales.

Example

While gold prices may increase in times of uncertainty, they could decline in periods of peace and prosperity. Gold prices dropped 30% from 2011 to 2013. In the years before that, gold prices ran up during the Great Recession as people worried about the stability of financial institutions.

Once the financial crisis was over, we entered a period of relative peace—both economically and politically—which may have resulted in investors feeling comfortable enough to move their money into other assets. With lessening demand, gold prices dropped.

Future outlook

The current global situation seems precarious, with war in both Ukraine and the Middle East.

“A persistent theme of geopolitical tension should continue to drive Central Bank reserve diversification,” according to J.P. Morgan Private Bank. With central banks continuing to buy gold, supplies may tighten and prices rise.

Goldman Sachs also points to “geopolitical shocks” in its gold forecast for 2025. They think mounting U.S. debt and possible financial sanctions could boost gold prices another 15%.

As an advisor, I work with clients to align their choice of investments with their goals and time horizon. 

For example, if you need the funds within three years, I typically recommend staying liquid in cash alternatives. If, however, your time horizon is three-plus years (retirement), then we can take more risk with those assets, such as stocks, commodities, real estate, alternatives, etc. 

I will caveat by saying that when it comes time to take required minimum distributions (RMDs) from your retirement accounts, pay attention to how easy it is to disburse funds. Stocks can be liquidated and sold to meet the distribution needs within a few days.

Catherine Valega, CFP®

Why is the price of gold dropping?

When the price of gold drops, it is hard to point to any one reason as the cause. Many of the factors influencing gold prices are intertwined. That means that when gold values decrease—or increase—there are often multiple variables at play. Because of gold’s short-term volatility, many people choose to use it as a long-term investment. For that, a gold IRA is a popular option, as it allows investors to save for retirement while benefiting from valuable tax breaks.

Check out our recommendations for the best gold IRA companies to get started.