What is driving the gold price?

What is driving the gold price to new highs.

by Henry Cobbe CFA, Head of Research, Elston Consulting

The key drivers of the gold price are summarised below and have had different degree of impact at different times.

The following are the key gold demand drivers listed in order of volume of 2025 demand measured in tonnes (as per World Gold Council Data)

• Investment purposes (2,175.3 tonnes): Gold has always been a store of value since biblical times.  Ever since the end of the gold standard, when the gold price had a fixed dollar value, it’s value in fiat (paper) money terms has fluctuate.  Investors may hold directly in bars or gold coins, or indirectly via physically-backed Exchange Traded Commodities (ETCs).  A growing volume of physical gold trading has moved away from gold bullion bars (which are hard to move) and coins (which are easy to lose) to physically-backed Exchange Traded Commodities (ETCs).  There is a large number of Gold ETCs to choose from for US investors on the NYSE and for UK investors on the LSE. The overall level of assets in Gold ETCs reached a record highs of US$559bn AUM, with total holdings of 4,025 tonnes.
• Jewellery (1,638.0 tonnes): Gold has retained its lustre for the creation of jewellery and luxury items for men and women alike across continents.  (But as I argued in my Valentine’s Day article for City Wire in 2024, if you can’t give your date a gold necklace, you could give a Gold ETC for their portfolio instead.)
• Central Banks (863.3 tonnes): Central Banks are major holders of physical gold bullion as part of their reserves management policy.  Whereas some Western central banks moved away from Gold towards a diversified basket of government bonds (with the UK under the then Chancellor Gordon Brown famously selling the approximately 400 tonnes, approximately 60% of the UK’s total gold reserves at a price of $275/oz in 1999/2020).  However, as outlined in our “Gold: an age-old diversifier” CPD webinar from 2021, although the amound of Gold in Western Central Banks decreased, the overall amount of Gold in Central Banks started to increase from 2008.  Within that trend, the incremental growth has come from emerging market banks in the BRICs countries (Brazil, Russia, India & China) that did not want their entire financial system dependent on the US Dollar and with concerns around the money-printing in the US (“Quantitative Easing”) potentially debasing the dollar.  Since the Russia/Ukraine war of 2022 and related US/UK/EU sanctions restricting Russia’s access to international payments and freezing its European-custodied international reserves, non-aligned countries such as China and India have started to increase their allocation to Gold to ensure their reserves independent and out of reach of any other states policy-making.  For countries wanting to operate agnostic to, or actively against US interests, “reserves sovereignty” is key.
• Technology (322.8 tonnes): gold remains a key component for industrial manufacturing (particularly electronics) including as a reliable, uncorrosive and malleable conductor for electronic components.  The growth in technology in general and AI in particular (gold is used in circuit boards and high-end GPUs in servers data centres) has given additional support to the gold price.

The debasement trade

Whilst the above demand trends have underpinned overall gold demand, the demand for gold as an investment – for central banks and investors alike has been driven by the debasement trade.
We characterise three aspects of the debasement trade.

1. Dollar devaluation: a strong dollar (and on the other side of the pair weak emerging markets currencies) was seen by some in the US as “currency manipulation” to disadvantage US manufacturing and make it cheaper for China and other countries to export goods to the US.  Stephen Miran – an economist and Trump ally – advocated in November 2024 for a so-called “Mar-a-Lago Accord” that called for a coordinated devaluation of the Dollar to boost American competitiveness.
2. Debt affordability: concerns that long-term debt in the US/UK is not affordable from a Debt/GDP perspective creates tensions of its own.  The US is in a stronger position as it is still the world's global reserve and trading currency.  Whilst debt restructuring could also form part of the Mar-a-Lago Accord, we argue that the UK could reduce the aggregate level of its indebtedness by initiating an Operation Brit-Twist where the DMO issues near-term debt to pay off the face value of long-term debt, taking advantage of the fact that long-term debt trades at a discount to face value.
3. Debt devaluation: by “living with inflation” and allowing inflation to run above-target rates concerned us back in 2021 and concerns us still today.  With persistent above-target inflation, the value of government debt in real (inflation adjusted) terms is eroded away.  Whilst Governments may not want to admit it publicly, letting inflation run a little hot is a helpful way to erode the value of debt liabilities over time (and a bad deal for savers holding cash and nominal bonds for the very same reason).  Emerging market countries have done it in the past, developed market countries are arguably doing it now.

How can investors ensure portfolio resilience?

We think investors can ensure portfolio resilience by considering the following with respect to each asset class.

• Equities: different segments of the equity market are facing different pressures and opportunities.  Pairing growth-oriented segments (such as US equal weight equities and emerging markets) with value/income-oriented segments (such UK equity income) provides more balance than a concentrated approach.
• Bonds: with developed market government bonds under pressure, it makes sense to be mindful of duration, and also to seek diversification in more fiscally prudent emerging markets.  The developed and emerging labels are no longer reflective of sovereign risks.
• Alternatives: with bonds under pressure, seeking out diversified assets to construct an all weather portfolio enables the potential for risk-based “true” diversification (introducing uncorrelated exposures), such that the risk of the whole is less than the sum of its parts.

The structural shift in the Dollar, developed market debt and inflation regime could prove to be long-term trends rather than short-term calls.  Understanding their fundamental drivers helps frame the decision-making around the pace and extent of implementation.
Please register if you would like to attend our CISI-endorsed CPD webinar on Ensuring Portfolio Resilience.