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Economic Factors Affecting Gold and Oil Prices

Global economic factors influence gold and Oil prices. Understanding these factors is important, as it helps traders and investors make better investment decisions and manage the risks involved in investing in gold and oil.

In lesson 2, we will learn how inflation, interest rates, the US dollar, and global political and economic events affect the commodity market, especially gold and oil prices.

The Inflation

Inflation increases the prices of goods and services, reducing the country's purchasing power. The increase is measured by the annual percentage change in the consumer price index (CPI).

According to the Federal Reserve Central Bank, the inflation rate shouldn’t stay above 2% because it helps the economy grow, but it shouldn’t exceed that level.

Crude oil is the main global energy source for transportation, industry, and manufacturing. When the global oil price increases by 10%, domestic inflation rises by 0.4%, as we saw during the Iran-US Oil Shock.

There are different types of inflation, such as:

• Demand-pull inflation: This occurs when demand increases faster than supply, pushing prices above their sustainable levels.

• Core Inflation: This is a measure of inflation of goods and services prices without the volatility.

• Hyperinflation: It is an extreme case of high inflation, defined as a 1,000% increase in the prices of daily goods and services.

• Cost-push inflation: It increases the cost of production for firms, causing businesses to raise prices to maintain profits.

• Wage inflation: When workers receive higher wages, it increases businesses' production costs.

• Imported inflation: When imported goods and services rise, it increases production costs and customer prices.

Example

When the Strait of Hormuz was closed, it had an impact on Core inflation for one, two, and three quarters, pushing inflation higher by 0.35, 0.79, and 1.47 percentage points, while core inflation increased from 0.18 to 0.49 percentage points.

As noted by the Federal Reserve Bank of Dallas, inflation is expected to increase by 0-0.61 percentage points over the next year, with the next 5-10 years expected to increase from 0 to 0.07 percentage points.

However, gold acts as an inflation hedge because investors use it as a store of value when currencies depreciate. As we have seen during the Russia-Ukraine Conflict of the post-2022 period, gold prices hit an all-time high, reaching 5,100 US dollars per ounce in 2025, as reported by New Eastern Europe .

The Interest Rate

The cost of borrowing and the lending amount affect how shops and businesses set their prices. Interest rates directly influence gold through the opportunity cost because it does not earn interest. However, interest indirectly affects oil prices because it affects economic growth and industrial activity.

• Higher interest rates make borrowing more expensive and saving more attractive to investors, which reduces spending and inflation.

• Lower interest rates increase demand for borrowing and spending. This increase in goods and services raises the inflation rate.

Traditionally, gold pays no interest like bonds or stocks, which we call a non-yielding asset in the financial market. When interest rates rise, demand for get falls as investors seek higher-yielding assets. But when interest rates fall, demand for gold will increase as gold prices rise.

US Dollar

The US dollar plays an important role in internationally traded commodities such as oil, gold, cocoa, and sugar, as they are priced in dollars. The value of the dollar influences the commodity prices even as supply and demand conditions change. This is called the petrodollar system, which is used only for oil in US dollars, and has been used since the 1970s.

In general, the commodity has an inverse relationship with the US dollar, but this relationship isn’t always consistent amid global uncertainty and high inflation.

Gold is influenced by economic conditions such as inflation, interest rates, global economic and geopolitical risk, and central bank policy. Sometimes, gold and the US dollar move in opposite directions. A stronger US dollar makes gold prices cheaper, while a weaker dollar makes them more expensive.

Example

From early 2021 to mid 2022, global food prices increased by 30% and oil prices increased by 150%. The US dollar, instead of weakening, has strengthened against major currencies (BIS, 2025).

Global Economy

Demand and supply have a strong impact on economic growth. When the economy expands, people tend to spend more, which often increases demand for crude oil, leading to higher prices. And if supply expands to the same level as demand, then the price will remain stable. However, if the supply can't keep up, then it might cause inflation.

However, gold may perform differently. It acts as a safe-haven asset and is in high demand when global economic conditions are uncertain. When the global situation is calm, people tend to seek higher dividends, such as stocks, rather than gold.

The principles of a market economy also show that when the supply and demand balance at a point in the future, it’s called equilibrium. This equilibrium point shows the market has equal supply and demand.

This means the price has been set perfectly to capture customers' interest in the goods, and at the same time, this price zone can help companies produce products that meet demand, not too much, nor too little.

Example

The Office for Budget Responsibility has reported that the post-pandemic UK was held back by a supply imbalance, leading to higher pressure on energy products and the labor market.

This situation raised inflation due to the increase in goods and services. Declining gas reserves in Europe and increased demand from China are disrupting supply, with wholesale gas prices reaching historic highs.

Political Events

Political impact on the global commodity market, especially oil and gold. Gold responds differently from crude oil because gold functions as a store of value. Oil is more closely linked to global production, transportation, and energy demand. When global economic institutions are uncertain, it often affects both demand and oil prices.

Case Study

Dexiang Mei (2025) used the asymmetric Granger causality (ASGC) and quantile Granger causality (QGC) tests to assess the Impact of global tensions on commodity futures from a geopolitical risk perspective.

The ASGC shows that uncertainty can significantly impact the market, both positively and negatively, while the QGC results show that these effects can lead to low volatility, financial stress, and sharp price swings due to investor decision-making driven by panic and greed.

Example

Source: Gold Silver

The image shows gold vs. stocks during a recession when a global economic shock occurs; gold usually rises against the traditional financial markets.

During the Great Depression, the US stock market declined by 89% from 1929 to 1932. Gold rose 69%, which contributed to the US dollar's depreciation. 

Another example of a stagnation crisis, the recession between 1973 and 1975 slowed economic growth, leading the stock market to drop by 48% while gold increased by 180%.

Key Takeaways

• The increase in inflation reduces purchasing power and increases commodity prices, such as oil, while gold tends to perform well amid high inflation.

• Gold is seen as a safe haven because it often moves in the opposite direction of the traditional stock market.

• Oil is the most important global energy source for transportation, industry, and manufacturing, and is influenced by global economic and geographic factors.