In-depth Analysis of Gold Price Increase: From Theory to Practice

Gold, as a globally recognized safe-haven asset, experiences price fluctuations influenced by multiple factors. To truly understand the reasons behind gold price increases, one needs to grasp the macroeconomic logic of pricing and combine it with actual market trading experience for judgment.

Two Core Drivers of Gold Pricing

Years of market research show that the reasons for gold price rises boil down to just two dimensions:

First is the U.S. inflation level. Inflation indicators such as the Consumer Price Index (CPI), Personal Consumption Expenditures (PCE), directly determine the purchasing power of the dollar. When inflation is high, gold priced in USD becomes relatively cheaper, leading to a surge of capital into the gold market for asset preservation. The most famous historical example occurred in the 1970s-80s, when the U.S. experienced oil crises causing inflation to soar, and gold prices hit record highs. The situation after 2020 also confirms this pattern: the pandemic disrupted global supply chains, shortages pushed up prices, and gold prices rose accordingly.

Second is the level of U.S. Treasury yields. The yield on the 10-year U.S. Treasury reflects the return on dollar assets. When Treasury yields decline, the returns on dollar holdings decrease, prompting investors to shift toward non-yielding but store-of-value assets like gold. In 2020, the Federal Reserve implemented large-scale quantitative easing, causing Treasury yields to fall to historic lows, the dollar to depreciate, and gold to climb steadily.

Simply put: Higher inflation makes gold more popular, lower interest rates make gold more valuable.

How Geopolitical Conflicts Drive Gold Price Increases

The 2018 U.S.-China trade tensions and the 2022 Russia-Ukraine war provide clear examples. The logic of geopolitical events affecting gold is quite direct—they often disrupt the efficiency of global supply chains.

When supply chains break down, goods circulation is hindered, costs rise, and ultimately prices increase. The Russia-Ukraine conflict is a typical case: both Russia and Ukraine are major global energy and grain producers. The outbreak of conflict directly led to soaring prices for crude oil, natural gas, wheat, and other commodities, bringing inflation along with it. This is a signal of gold price increases.

However, not all geopolitical events are bullish for gold. The key criterion is: Will this event push inflation higher? If the event leads to deflation rather than inflation, gold may actually decline.

The Subtle Relationship Between Central Bank Policies and Gold Trends

Among many central banks, the Federal Reserve’s actions have the most direct impact on gold prices. The Fed’s interest rate decisions are announced via the FOMC (Federal Open Market Committee) meetings, and investors can track the probability of rate changes using tools like FedWatch. When the market expects a lower likelihood of rate hikes, gold tends to be supported and rise. Conversely, signals of rate hikes put downward pressure on gold.

The underlying logic ties back to the earlier discussed U.S. Treasury yields—interest rate decisions directly influence the attractiveness of the dollar, thereby affecting investors’ allocation to gold.

Changes in Institutional Positions as a Signal for Gold Price Direction

Besides macroeconomic factors, the behavior of professional investors can provide valuable signals. The Commitments of Traders (COT) reports published by the CFTC show that the holdings of hedge funds and “smart money” in gold are often positively correlated with gold prices—they tend to increase long positions when prices rise.

Interestingly, holdings of physical gold market participants (manufacturers, traders, etc.) tend to act as contrarian indicators. Their futures trading mainly aims to hedge risks rather than predict market direction. Therefore, their selling often occurs during gold price rallies, and buying during declines.

Monitoring these extreme positions of these two types of funds is especially valuable—when institutional positions are at historic lows (excessive bearishness), a reversal is often imminent. The patterns observed in 2018 and 2022 confirm this.

Framework for Judging Reasons for Gold Price Increases

Investors can use the following framework for quick judgment of the causes behind gold price rises:

• Upward signals in inflation data → Gold supported
• Central bank signals of rate cuts → Potential for gold to rise
• Geopolitical events threatening supply chains → Assess whether they induce inflation pressure
• Significant increase in institutional long positions → Watch for follow-through momentum
• Weakening U.S. dollar index → Gold usually moves in tandem

Hedging Strategies During Market Downturns

When anticipating a decline in gold prices, investors can not only hold cash and wait but also consider short-selling gold to participate in the market. Short selling involves selling gold contracts you do not own, aiming to buy them back at lower prices for profit. Contracts for Difference (CFDs) and futures are common tools for this strategy, allowing participation without physical gold and also serving as hedges against spot position declines.

Summary

To achieve stable gains in gold investing, one must master analysis across three levels: macroeconomic trends of inflation and interest rates, geopolitical supply chain risks, and institutional position changes. The reasons behind gold price increases are often hidden at the intersection of these signals. Investors should continuously learn and practice to sharpen their judgment, enabling more precise decision-making in the gold market.