Tue Feb 25

The gold price has surged to record highs. What’s behind the move?

Written by Dirk Baur, Professor of Finance, The University of Western Australia

The gold price has surged to a new all-time high above US$2,900 (A$4,544) an ounce this month.

It has risen by 12% since the start of the year and clearly outperformed US and Australian stock markets. The US stock index S&P500 is up 4% and the ASX 200 has gained just 2% in that time.

That follows an extraordinary run in 2024, when the precious metal surged 27%, the biggest rise in 14 years.

The drivers behind this surge include heightened uncertainty and fear of inflation that has been stoked by US President Donald Trump’s threats of tariffs, together with increased demand from central banks.

What explains gold’s recent rally?

There are many factors at play.

The supply of gold through gold mine production and recycling is relatively constant over time. But the demand is more variable, and consists of four major components: jewellery, technology, investment and central banks.

In 2024 ^[1], jewellery accounted for about 50% of total demand, technology or industrial demand was 5%, investment demand was 25% and central bank demand was 20%.

Investment demand refers to investors who buy gold as an asset. Central banks generally buy gold to diversify their reserve holdings.

As all four demand components vary over time (some more than others), gold price movements are sometimes driven by jewellery demand, sometimes by investor demand, and sometimes – as has happened recently – by central bank demand.

An Indian woman shops for jewellery for the Dhanteras festival. Sanjeev Gupta/EPA

What adds to the difficulty is that both the gold supply and gold demand are global. The supply comes from gold mines across the globe, from emerging countries in Africa and industrial countries such as Australia and Canada.

The same is true for demand. While China and India dominate jewellery demand, the demand comes from many countries, as does investment demand. Central bank demand stems from large and small central banks around the world.

Why is there demand for gold?

One key reason for the popularity of gold is that it is considered to be a store of value ^[2]. This means gold rises with inflation and maintains its value in the long run.

In other words, an ounce of gold buys the same basket of goods (or more) today than 20 years ago. This is not the case for money (or fiat currency) such as the US or Australian dollars.

Due to inflation, the value of money is not constant but depreciates over time. Because gold holds its value, it is also called an inflation hedge.

While the store of value property holds in the long run, there is another important property that is more short-lived and particularly relevant during crisis periods.

Gold is seen as a safe haven in troubled times

The safe haven property of gold ^[3] means gold prices increase when investors seek shelter in response to a shock or crisis. For example, investors bought gold in reaction to the September 11 2001 terrorist attacks, the start of the global financial crisis in 2008, and the outbreak of COVID in 2020.

The safe haven effect of gold is generally short-lived ^[4], often resulting in falling gold prices after about 15 days.

Russia’s invasion of Ukraine in February 2022, and the subsequent sanctions on Russia – especially the freeze of Russia’s foreign government bond holdings abroad ^[5] – has highlighted the risk to governments of losing access to foreign currency holdings.

It appears some governments or central banks reacted to this with increased gold purchases. This led to a record high of 1,082 tonnes of central bank gold purchases ^[6] in 2022.

2023 saw the second-highest annual purchase in history at 1,051 tonnes, followed by 1,041 tonnes in 2024 ^[7].

The potential reaction of central banks to the Russian invasion of Ukraine is akin to investors seeking a safe haven, but is a rather new phenomenon for central banks.

There is an additional, secondary, effect of such central bank purchases and rebalancing from US dollars to gold.

Selling US dollars for gold implies a weakening US dollar, which increases the price of gold. (If the US dollar weakens, you need more US dollars to buy gold.) The inverse relationship between gold prices and currencies also makes gold a currency hedge. That means gold can protect investors from potential losses due to fluctuating exchange rates. This effect is particularly strong for rather volatile currencies such as the Australian dollar ^[8].

In contrast to the shock caused by the Russian invasion of Ukraine, the more recent increase in gold prices is harder to associate with a single shock.

Broader economic worries

The election of Trump has not only increased the risk of higher inflation due to tariffs and a trade war, it has also increased geopolitical risk as the US government reassesses its alliances with other countries.

The relative unpredictability of Trump compared with his predecessors and with politicians more generally may have increased uncertainty and gold prices. The recent gold price trend highlights that “gold loves bad news ^[9]”.

Gold prices may anticipate geopolitical shocks or higher inflation. Gold prices rose well before inflation increased after the pandemic and started to fall when inflation had peaked in 2022.

It is not clear exactly why gold has risen to all-time highs in 2025, but it’s possibly not good news for the world economy.