Gold prices have surged to an all-time high, surpassing USD 2,900 an ounce this month. The precious metal has gained 12 per cent since the start of the year, significantly outperforming stock markets.
The US S&P 500 has risen by just 4 per cent, while Australia’s ASX 200 has gained only 2 per cent in the same period. This follows an exceptional rally in 2024 when gold prices jumped by 27 per cent, marking the steepest rise in 14 years.
Several factors have contributed to this surge, including heightened economic uncertainty, inflation fears, and increased demand from central banks.
Concerns over potential tariffs under US President Donald Trump’s administration have also added to the volatility, pushing investors towards gold as a safe-haven asset.
Key Drivers Behind the Surge
The supply of gold remains relatively stable, coming primarily from mining and recycling. However, demand fluctuates due to four key factors—jewellery, technology, investment, and central bank reserves. In 2024, jewellery accounted for about half of global gold demand, while technology use made up 5 per cent.
Investment demand stood at 25 per cent, and central banks accounted for 20 per cent.
Gold prices often fluctuate based on which sector is driving demand. At times, jewellery consumption plays a significant role, while at other times, investment demand dominates.
The latest price rally, however, appears to be largely driven by central bank purchases.
Gold demand is global, with supply originating from both emerging and developed economies.
While China and India lead in jewellery consumption, investment demand spans multiple nations. Central banks worldwide, both large and small, have been increasing their gold holdings, contributing to the price surge.
Gold as a Store of Value
Gold’s appeal lies in its reputation as a store of value. It tends to rise with inflation, preserving purchasing power over time.
Unlike fiat currencies such as the US dollar or Australian dollar, gold does not depreciate due to inflation. This makes it a preferred hedge against economic instability.
During periods of crisis, gold also serves as a safe-haven asset. Investors flock to gold during financial or geopolitical turmoil, causing its price to rise.
Historical examples include the aftermath of the September 11 attacks, the 2008 global financial crisis, and the COVID-19 pandemic in 2020. However, this effect is usually short-lived, with prices stabilising within weeks.
The Role of Central Banks
The 2022 Russian invasion of Ukraine marked a turning point in global financial strategies. Sanctions against Russia, including the freezing of its foreign currency reserves, made governments wary of holding too many US dollars.
As a result, central banks began diversifying their reserves, leading to record gold purchases.
In 2022, central banks bought 1,082 tonnes of gold, the highest ever recorded. Purchases remained elevated in 2023 and 2024, with 1,051 tonnes and 1,041 tonnes bought, respectively.
This shift reflects a growing desire among nations to reduce reliance on the US dollar and protect against currency risks.
A secondary effect of these purchases is a weaker US dollar. When central banks sell US dollars to buy gold, it reduces demand for the currency, lowering its value.
A weaker US dollar, in turn, drives up gold prices, creating a cycle that further strengthens gold’s role as a hedge against currency fluctuations.
Broader Economic Concerns
The recent surge in gold prices is not linked to a single crisis but rather a mix of economic concerns. The election of Donald Trump has heightened fears of inflation, particularly due to potential trade wars and tariff hikes.
Additionally, geopolitical uncertainty has increased as the US reassesses its alliances.
Trump’s unpredictability compared to his predecessors has led to growing concerns in financial markets. Gold prices historically rise in response to economic and geopolitical instability, and the latest rally suggests investors are bracing for potential turmoil.
Gold prices often act as an early indicator of economic shifts. For instance, they surged before inflation spiked after the pandemic and started to decline once inflation peaked in 2022. The current price rise may be a warning sign of underlying economic stress.
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