Global uncertainty driving gold prices higher despite bubble fears
Goldbugs have a spring in their step these days. In the third quarter of this year, gold was the second-best performing major financial asset after silver, according to Deutsche Bank data. Last month, the price of bullion hit a record high 13 times and currently stands just above US$4,000 per troy ounce after surging 54 per cent this year, the biggest gain since 1979.
The past several years have been a boon to the yellow metal, whose role as a store of wealth is amplified during times of economic and political uncertainty. Gold has benefited from the post-pandemic surge in inflation and the recent decline in interest rates, which makes it more attractive to hold relative to income-producing assets. Moreover, bullion rises when the US dollar depreciates since it is priced in dollars and competes with cash.
The price of gold has soared around 120 per cent in the past two years. Although the precious metal generates no cash flow – veteran investor Warren Buffett famously dismissed gold as being “neither of much use nor procreative” – its hedging properties and liquidity are prized by investors when mainstream assets come under severe strain.
This is what makes the current bull market in gold so striking. Bullion’s blistering rally comes at a time when global stock markets are at record highs and corporate bond markets are priced for perfection. The Chicago Board Options Exchange’s Volatility Index, popularly known as Wall Street’s “fear gauge”, has plunged from 52 points just after US President Donald Trump unveiled his sweeping “Liberation Day” trade tariffs to just 16 points.
This suggests there is more to the gold rally than meets the eye. George Saravelos of Deutsche Bank said that although foreign investors are still buying US equities and bonds, they are hedging their exposure to the US currency so their investments are not affected by movements between the dollar and their home currencies. “Foreigners may have returned to buying US assets, but they don’t want the dollar exposure that goes with it,” Saravelos said.
Bullion is a big beneficiary of the “debasement trade”, which is a new buzzword in markets. According to JPMorgan, this reflects a combination of factors that include geopolitical and policy uncertainty, worries about inflation, fears about the sustainability of countries’ public debts and waning confidence in some fiat currencies.
Gold is not so much a refuge as a hedge against the deterioration in policy credibility and governability in many advanced economies. Although the United States is not alone in displaying some characteristics typically associated with vulnerable developing economies, Trump’s egregious disregard for the rule of law has increased concerns about the independence of the US Federal Reserve, the world’s most important central bank.
This is partly why other central banks and sovereign funds have accumulated gold more aggressively in recent years to diversify away from the US dollar. The share of gold in total central bank reserves rose from close to 15 per cent in 2023 to nearly 24 per cent at the end of the second quarter of 2025, according to data from JPMorgan.
Furthermore, gold-backed exchange traded funds (ETFs) recorded their largest monthly net inflow last month, taking net inflows in the third quarter to US$26 billion, the strongest quarter on record, according to the World Gold Council.
Yet it is bullion’s support base in Asia, where owning gold is deeply rooted in many countries’ cultures, that merits close attention. The People’s Bank of China (PBOC) has increased its gold holdings significantly in the past several years and is seeking to play a bigger role in global bullion trading.
According to Societe Generale, if China maintains its purchases of gold at the rate it has been accumulating the precious metal since mid-2022, bullion could account for 20 per cent of the PBOC’s reserves by 2033. China’s growing appetite for gold, which is “a geopolitical move, not just an economic one”, could prove “extremely supportive of gold prices”, Societe Generale said.
To be sure, gold is by no means a safe haven. A cursory glance at its performance in the past several decades shows it has been more volatile than benchmark 10-year US Treasury bonds and the S&P 500 equity index. Moreover, Buffett is right to point out that “if you own one ounce of gold for an eternity, you will still own one ounce at its end”.
In fact, some see signs of a bubble. Even the World Gold Council suspects gold may not have much “left in the tank” given that bullion “looks overbought”. By contrast, in a report on September 26, analysts from Barclays found that gold was still undervalued and did not appear to be pricing in much of a dollar debasement premium, presenting “more upside if Fed independence and [foreign exchange] debasement concerns mount further”.
What is clear is that gold is feeding off fears about the governance and institutions of the US. While the government shutdown has amplified these concerns, there are deeper worries about Trump’s reckless policies that are gnawing at many investors. Respondents to Bank of America’s latest global fund manager survey on September 16 said a second wave of inflation and dollar debasement were the two biggest tail risks.
In a market starved of risk-free assets, gold’s role as a hedge against uncertainty and instability has significant appeal. The yellow metal is likely to continue shining for some time yet.
Source: https://www.scmp.com/