Gold benefitting from fiscal concerns, further potential upside

Gold has defied rising real yields since 2022. Central bank buying, debt sustainability fears, and currency debasement risks continue to drive demand.

The resilience of Gold in an era of inflation and debt concerns

​Gold benefitting from fiscal concerns, further potential upside
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Mike Bell, CFA, Interim Macro Investment Strategist at Elston Consulting

Source: LSEG Datastream, J.P. Morgan Asset Management. Real yield is the US 10-year Treasury inflation-protected security yield. Past performance is not a reliable indicator of current and future results. Guide to the Markets - UK. Data as of 26 September 2025.

Gold has performed very well in recent years, particularly since 2022. Historically, as a zero-yielding asset, gold has often been negatively correlated with real government bond yields. Yet when real yields rose sharply in sharply in 2022, gold proved unusually resilient to competition from higher government bond yields and has powered higher over the last couple of years. Why?

Part of the reason real yields rose in 2022 was that central banks tightened monetary policy in response to an inflation shock caused by both a rebound in spending post Covid but also an energy price shock linked to the Russian invasion of Ukraine. But in response, a large amount of Russian foreign reserve assets were frozen by the West. Since then, central bank buying of gold has accelerated meaningfully relative to the pre-2022 pace of central bank gold accumulation. This has been one factor that has helped support the gold price despite higher real government bond yields in the West.
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Another factor driving demand for gold is concern around the sustainability of government debt burdens. In many major developed market economies, such as the US, UK, France, Italy, Spain and Japan, government debt to GDP levels are now very high.

Source: Bank for International Settlements (BIS), General government debt at nominal value as a percentage of GDP, adjusted for breaks. Data as of Q1 2025.

There has also been a reduction in price insensitive demand for long dated government bonds as central banks are not only no longer engaging in QE and yield curve control but are also reducing the amount of government bonds they hold. Changes to pension systems, such as the shift away from defined benefit pension schemes is also reducing one prior source of structural demand for long dated government bonds.

For government debt levels to be sustainable, over the long run borrowing costs plus the difference between spending and the tax take must be below nominal (real plus inflation) growth. That’s not currently the case in most countries and demographic pressures plus the negative effect that tax hikes and/or spending cuts have on growth make it very hard for democratically elected governments to address this fundamental problem.

The most likely eventual outcome is therefore that governments and central banks will have to reduce government borrowing costs while also eventually reducing spending in real terms. Historically, some form of financial repression, often involving printing more money and devaluing the currency that the debt is paid back in, has often been part of the solution to reducing high government debt burdens. In that scenario, real yields tend to fall and gold often performs well, as currencies and debts are devalued.
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While it could take a potential bond market crisis to cause the authorities to intervene to lower real government bond yields, we think that gold could continue to provide a useful hedge against the potential debasement of government debt and fiat currencies, in much the same way as it has many times throughout history.