Over the past year, the price of gold has risen by almost 50%, and over the past 5 years, it has appreciated by around 100%. Investors in gold have made money. Profits attract media attention. Recently, everyone seems to have caught the gold bug. Why?
Gold is a store of value. Its daily price movement is driven by global demand from individuals, institutions, and central banks. It is a hedge against risk, both political risk and inflation risk. Gold is also a diversification asset. That matters because we live in a time of political and economic uncertainty. This uncertainty causes demand for gold to rise.
In the United States, few know what President Donald Trump will do next. His social media comments and political statements cause volatility in financial markets. Owning gold is a hedge against volatility. The election of Trump explains, in significant part, the recent sharp appreciation of gold. Buyers of gold are worried that Trump will try to inflate away the dangerously high net U.S. federal deficit, which is at about 100% of GDP. In addition, annually, the deficit approaches 5% to 6% of GDP. The deficit is out of control.
Seemingly, there is no will among both Republican and Democratic elites to change the trajectory of the federal deficit. Certainly, Trump shows little interest in the necessary reforms to reduce the federal deficit over time. His One Big Beautiful Bill Act raises the federal deficit even more. His other contribution to the inflation outlook is to push for lower interest rates to reduce the cost of servicing the federal deficit and to stimulate the economy. But inflation is well above the Federal Reserve Board’s 2% inflation target, and the economy is growing at a rate of about 4% according to the Federal Reserve Bank of Atlanta. Demand for gold is high because Trump’s policies, including his tariffs, are inflationary.
Buyers of gold are betting against Trump’s policies.
The U.S. and China are engaged in a global battle for economic supremacy. The two countries have just reached a trade truce, but this did not alter the fundamental conflicts between them. China wants to dominate the global manufacturing sector and reduce the status of the U.S. dollar as the world’s reserve currency. China is buying gold. With its massive dollar-denominated trade surpluses, China buys gold and not U.S. Treasurys. China is also using its gold purchases to weaken U.S. dominance of global financial markets. China sees gold as an alternative to the U.S. dollar.
Several wealthy countries are facing government spending problems. Deficits are high. Consensus on reducing deficits is low. See what is happening in both France and the United Kingdom.
International investors buy gold as an alternative to purchasing the sovereign debt of highly indebted wealthy countries. Gold buyers have lost confidence in governments around the world. Global central banks have been buying gold as a diversification strategy away from U.S. dollar-denominated assets. Some central banks see gold purchases as a way to reduce the coercive power that the U.S. uses in global financial markets.
LOOMING SNAP DEADLINE AMPS UP SHUTDOWN PRESSURE ON BOTH TRUMP AND DEMOCRATS
Private investors have seen the appreciation in the price of gold. Investors often focus on short-term price movements. American investors, in particular, follow price momentum. Gold is going up, so private American investors buy more gold. Not to be trite, gold is going up because it is going up. Money flows into funds that focus on gold are at record highs.
Make no mistake, however, gold will not supplant the U.S. dollar and U.S. Treasurys as the preeminent global financial assets. The U.S. dollar is trading near a six-month high against a basket of currencies, and yields on U.S. Treasurys are stable and in many cases falling. The sharp rise in the price of gold this year is arguably not sustainable.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].
