Quick Bite: Gold surging to record highs
Author: Paul Zwi
Gold surged past USD 2,930 per ounce last week, hitting new record highs, driven by strong safe-haven demand amid mounting trade tensions and economic uncertainty. President Trump recently imposed tariffs on steel and aluminium imports into the US and signalled new tariffs. Geopolitical tensions also grew in the Middle East, raising the risk of renewed conflict. Meanwhile, expectations of looser monetary policy are supporting gold. Markets anticipate two US rate cuts in 2025, while the Bank of England (BoE) has recently made dovish rate cuts, following similar moves by the European Central Bank (ECB). Additionally, central bank gold purchases continued to boost bullion, with the Bank of China increasing its reserves for the third consecutive month in January.
Source: Goldprice.org
As we have discussed in previous QBs, the price of gold moves due to a myriad of factors, including a combination of supply and demand, interest rates (and interest rate expectations), and investor behaviour regarding risk. That seems simple enough, yet the way those factors work together is sometimes counterintuitive and unpredictable.
For instance, many investors think of gold as an inflation hedge. That seems plausible, as paper money loses value as more is printed, while the supply of gold is relatively constant. However, the relationship between gold and inflation is weak at best. Interest rates, currency movements and overall market volatility are probably better predictors of gold’s performance in the short run.
Key Takeaways
- Supply, demand, interest rates, and investor behaviour are key drivers of the gold price.
- Gold is sometimes used to hedge inflation in the belief that gold will appreciate and offset inflationary pressures, but this is tenuous at best.
- Gold is subject to investor sentiment about risk. But this relationship is unreliable, as gold can be caught up in a “risk off commodity slide” and decline with other commodities.
- Gold does not yield any interest income; it costs money to hold, with storage and insurance being expensive.
- One advantage of investing in gold is liquidity. Gold is universally recognised and can be easily bought or sold in various forms such as ETFs, gold mining and exploration shares, coins, bars, and jewellery.
Moreover, gold can serve as a strategic asset in an investment portfolio due to its low correlation with other asset classes. Gold price movements are more often correlated with the stock markets during “risk-on” periods and less correlated to periods of market stress. But note that the correlation between two assets can change over time.
The price of gold is generally inversely related to the value of the USD (because the metal is US dollar-denominated). All else being equal, a stronger USD tends to keep the price of gold lower, while a weaker USD is likely to drive the price of gold higher. And yet, gold is breaking out to new record highs at a time of USD strength. Markets are difficult to predict! Fortunately, we have been on the right side of gold’s movements, having been bullish gold prices for at least the last 12 months.
Source: Gavekal Research
The World Gold Council’s latest report indicates that central banks remain aggressive buyers of gold:
“Annual investment surged 25% to a four-year high of 1,180t, driven in part by stable gold ETF holdings after three years of heavy outflows. Central banks remained aggressive buyers, surpassing 1,000t for the third consecutive year.”
Central Banks are set to continue their buying sprees, with China taking the lead. Even at these high prices, China bought about 160k ounces of gold in January 2025, according to official sources.
Source: MacroVisor
The chart above shows China is still far behind the US in its holdings of gold, and many other countries. Recent news suggests that China is encouraging other sectors to invest in gold (e.g. a pilot program is underway for insurance companies to add gold to their portfolios for asset liability management). So, it’s unlikely that their buying spree stops here. And quite likely that gold purchases are coming at the cost of investing in US Treasuries, which could mean higher yields for US Treasuries.
