Gold prices have risen more than 15% since the start of the year, surpassing the important milestone of $5,500 this week.
The precious metal’s rise, like that of commodities like silver and platinum, is driven by a number of interrelated factors, including geopolitical tensions, rising government debt and uncertainty about the outlook for interest rates and inflation.
Gold’s appeal is linked to its role as a safe-haven asset, acting as an “inflation hedge.” When the dollar loses value, it usually appreciates in value, is easily sold, and is a tangible, finite commodity.
These factors are important at a time when questions are being raised about fiat currencies such as the U.S. dollar and the Japanese yen. As government debt rises, so do concerns about inflation and fiscal stability.
In the U.S., the Trump administration’s inflammatory policies have fueled market jitters about the health of the economy, triggering what some analysts consider a “sell America” trade. In recent weeks, the president has threatened to conquer Greenland, suggested U.S. intervention in Iran, tried to influence Federal Reserve policy and launched an attack on Venezuela. On top of that, he has threatened to impose more tariffs on trading partners, which will be an old tactic from 2025 onwards.
While analysts don’t believe the U.S. dollar will lose its status as the world’s reserve currency anytime soon, investors appear to be diversifying away from the U.S. dollar. The next steps for the United States remain uncertain, and no one wants to be the target of public criticism. As an alternative to fiat currencies, gold appears to be a strong portfolio option.
“Investors previously bought U.S. Treasuries because they were considered fairly risk-free. But particularly because of the way some wealth has been weaponized, some countries have become more cautious about how they allocate capital,” said Simon Popple, managing director at Brookville Capital. “A weaker dollar helps gold prices rise,” he told Euronews.
Relevant
Even so, Popper and other analysts stress that the main factors driving gold prices higher are far less complex. As gold continues to make headlines, investors are attracted to the momentum, sparking a buying frenzy.
“People are naturally attracted to things that are dynamic that they see, and they’ve seen gold have a phenomenal run up,” said Chris Beauchamp, chief market analyst at IG. “It’s certainly going to generate interest.”
He added that while gold has favorable investment properties, the metal’s ability to hold value has been overstated, especially in the short term. Gold’s position in the market changed significantly after former U.S. President Richard Nixon decided in 1971 to end the dollar’s direct convertibility into gold. Simply put, countries no longer anchor their currencies to specific amounts of precious metals.
“The gold standard is still used to suggest that metal is some kind of totemic asset that we should own because it’s a fixed store of value. That’s not the case,” Beauchamp concluded.
Kenneth Lamont, head of manager research at Morningstar, reiterated the message and also compared gold to cryptocurrencies. He emphasized that while supplies of both are limited, they are both “extremely unstable.”
“If you use cryptocurrency or gold to buy something, the price may decrease by 30% from one day to the next. In the short term, it’s not actually a very good store of value.”
While gold is more mature than Bitcoin and has historically performed well over the long term, analysts stress that the unpredictability of both assets means the death knell for fiat currencies has not yet sounded.
The precious metal fell around 3% in early trading on Friday in Europe. Despite the setback, gold prices still appear likely to rise further in the coming months given the volatile nature of global politics.