Fluctuations in the price of gold are driven by a slew of different factors. Three of the primary factors are: interest rates, the value of the U.S. dollar, and the level of fear and volatility in the markets.

How Gold Prices Move

Here's how the relationships between gold and these factors generally tend to work: 1) When interest rates are rising, gold prices will often fall because gold is non-interest bearing. If investors can get higher yield elsewhere, the demand for gold diminishes. 2) Since gold is most often denominated in U.S. dollars, gold and the dollar are inversely correlated. As a result, when the dollar rises in value, gold prices tend to fall, and vice versa. 3) Gold is considered a "safe-haven" asset – in times of market turbulence, investors tend to flock toward the perceived safety of gold. On the other hand, when markets are booming, gold tends to lose its safe-haven value.

Gold Under Pressure

The chart of gold prices below shows some of these dynamics in play. A sharp and sustained fall has occurred for much of this year, starting in April. At the same time, interest rates, bond yields and the U.S. dollar have all been surging, and the demand for safety has diminished due to a high-flying stock market. All of these conditions helped place heavy pressure on the price of gold.

Bounce from Lows

Things have changed in the past couple of weeks, though, as the equity markets have pulled back sharply, while bond yields and the dollar have appeared to stall. This has helped trigger a substantial rebound for gold that has pushed the precious metal up from the sub-$1,200 level to approach key resistance around $1,240. With any further market turbulence and/or pullback in interest rates and the dollar, a gold breakout above $1,240 could signal an extended rebound and recovery for the precious metal.

Chart showing the price of gold

Source: TradingView