The Golden Surge: Understanding Gold's Historic Rally and What's Driving It

Gold has captivated humanity for millennia, serving as currency, ornament, and store of value across different civilizations. But in recent years, the combination of low correlation and strong returns has made it one of the most important alternative liquid assets for an investor to ponder adding to their portfolio. Understanding what has driven the precious metal requires looking at both the timeless qualities that make gold unique and the contemporary forces reshaping global finance right now.

Gold 101: The Fundamentals

Gold is similar to other commodities and crypto in that, unlike stocks or bonds, it produces no cash flows. That said, it is also fundamentally different from most other commodities. While copper powers electrical grids and oil fuels transportation, gold's primary value lies not in its consumption but in its preservation. Roughly half of all gold demand comes from jewelry, about 40% goes into investment products like bars, coins, and exchange-traded funds, and only about 10% serves industrial purposes, primarily in electronics where its conductivity and resistance to corrosion prove invaluable.

The supply side of gold is remarkably inelastic. Annual mine production adds only about 1-2% to the existing above-ground stock each year. Unlike oil wells that can ramp up production relatively quickly, bringing a new gold mine online takes years of exploration, permitting, and construction. This means supply cannot quickly respond to price spikes. Central banks hold approximately 35,000 tonnes in reserves, representing roughly 17% of all gold ever mined, while the jewelry market and private investment account for the bulk of the remainder.

This unique supply-demand dynamic means gold doesn't behave like typical commodities. When oil prices rise, producers drill more wells. When gold prices rise, supply barely budges. Instead, higher prices primarily shift gold between holders—from those selling jewelry to those buying bullion, from weak hands to strong hands.

The Drivers Behind the Rally

Gold's ascent from around $1,800 in early 2023 to recent peaks close to $4,000 this month represents more than a 200% gain. This rally has been fueled by a convergence of several powerful forces.

Source: Bloomberg, Modelist

Central Bank Accumulation: An Alternative to the US$

Perhaps the most significant driver has been unprecedented central bank buying, particularly from emerging market nations. China's central bank has been a particularly aggressive buyer, adding to reserves for months on end as part of a broader strategy to diversify away from dollar dependence. According to the World Gold Council, central banks purchased over 1,000 tonnes of gold in 2022 and maintained robust buying through 2023 and 2024. This marks a dramatic shift from the 1990s and 2000s when central banks were net sellers.

This buying reflects geopolitical realities. In a world of sanctions, frozen reserves, and multipolar competition, gold represents the ultimate neutral reserve asset. Put another way, it remains out of the control of any sovereign nation. Russia's experience of having dollar reserves frozen after its invasion of Ukraine sent shockwaves through central banks worldwide, accelerating the diversification away from dollar assets into gold, which cannot be frozen, sanctioned, or devalued by someone else's policy decisions.

The Return of Inflation and Real Rates

Gold traditionally thrives when real interest rates—nominal rates minus inflation—turn negative or remain subdued. The COVID-19 pandemic triggered massive monetary and fiscal stimulus, sparking inflation that reached 40-year highs in the United States. While central banks responded with aggressive rate hikes, real rates remained relatively low by historical standards, and the market's confidence in central banks' ability to maintain price stability was shaken.

Although inflation has cooled, growing concerns about government debt levels, deficit spending, and the potential for renewed inflation have kept gold flows persistent. With U.S. federal deficits running at 6-7% of GDP (think Second World War levels) even during the current economic expansion, investors rightly worry about the long-term value and purchasing power of currencies like the US$ under such policies.

A Safe Haven in a Time of Geopolitical Uncertainty

The world has become markedly less stable. Russia's invasion of Ukraine, escalating tensions between the United States and China, conflicts in the Middle East, and the fragmentation of the global order have all elevated risk. Gold has always played the role of a classic safe-haven asset during times of geopolitical turmoil.

The potential for both a broader de-dollarization movement and the loss of the US$ as the world's reserve currency has added to gold's appeal. Countries representing a significant portion of global GDP are actively discussing alternatives to dollar dominance in trade and reserves. Whether through BRICS currency proposals or bilateral trade agreements in local currencies, the direction of travel concerns dollar holders, and gold represents a possible alternative medium for exchange.

Price Momentum

Gold's doubling over the last two years has put gold firmly on the front page of financial media and on the radar of many retail investors. Concerns about debt, inflation, and a devalued dollar have helped, but there are also large classes of CTAs and traders who simply buy based on trend-following algorithms. Combine this good underlying narrative with investors' fear of missing out, and you have created the demand for a self-reinforcing price move upward.

Who's Buying?

The buyer base for gold has evolved and expanded significantly. Central banks, as noted, have emerged as the dominant force, with emerging market institutions leading the charge. These aren't speculative buyers but long-term, price-insensitive accumulators building strategic reserves.

Asian retail investors, particularly in China and India, represent another crucial constituency. Cultural affinity for gold remains strong, and rising wealth in these populations translates to consistent demand. Chinese investors, facing a troubled real estate market and limited investment options due to capital controls, have increasingly turned to gold as a store of value.

Western institutional investors, including hedge funds, family offices, and pension funds, have also increased allocations (with legendary managers like Ray Dalio and Paul Tudor Jones actively talking their own book). After years of underweighting gold relative to historical norms, many are rebalancing toward the 5-10% portfolio allocation that some recommend for precious metals. The ease of buying gold through ETFs has facilitated this institutional adoption.

Retail investors in developed markets, motivated by inflation fears and distrust of traditional financial assets, have contributed to demand through coins, small bars, and ETF purchases. The rise of precious metals dealers and the integration of gold into mainstream brokerage platforms has made access easier than ever.

Diversifier

In some ways, gold is the perfect asset (at least when it's going up). In a perfect portfolio, you want to add an asset with positive expected returns and no correlation, since your returns will be unaffected, but the risk as measured by volatility will diminish. Gold has a correlation to stocks over the last 20 years of only 0.07, about as close to zero as you can find.

Investment Vehicles: How to Own Gold

Investors can access gold through multiple channels, each with distinct characteristics. Physical gold—bars and coins—offers direct ownership but requires secure storage and insurance. Gold ETFs like GLD and IAU provide liquidity and convenience, tracking gold prices while holding physical bullion in vaults. These have democratized gold investing, allowing anyone to buy exposure as easily as purchasing a stock.

Gold mining stocks offer leveraged exposure to gold prices, as mining companies' profits amplify when gold rallies. However, they introduce company-specific risks around management, geology, and operations. Gold futures and options provide tools for speculation and hedging but require sophistication to navigate. For most investors, physical gold and ETFs represent the most straightforward approaches, with the choice depending on whether you prioritize ultimate security or liquidity.

Looking Forward

Gold's rally reflects legitimate concerns about monetary stability, geopolitical risk, and the sustainability of government debt levels. Unlike speculative manias based on narratives without substance, gold's advance has fundamental support from the largest, most conservative financial institutions in the world—central banks.

That said, gold faces headwinds. Should real interest rates rise significantly, gold's opportunity cost increases, making fixed income more attractive. A resolution of major geopolitical conflicts could reduce safe-haven demand. And gold's lack of cash flow means valuation is always somewhat subjective, dependent on sentiment and macro conditions rather than earnings or dividends.

Yet the structural factors supporting gold—dedollarization trends, fiscal and debt concerns, and the desire for monetary assets outside the banking system—remain in place. Whether gold continues straight up, consolidates, or corrects, it has reasserted its relevance in modern portfolios. In an era of unprecedented monetary experimentation and geopolitical uncertainty, the ancient refuge of gold has found renewed purpose.

For investors considering gold exposure, the key is viewing it not as a speculative vehicle but as a portion of your portfolio that has some insurance characteristics and remains a hedge against the tail risks of monetary instability and geopolitical chaos. Like all insurance, it has a cost in terms of foregone yield, but clearly adds value as a portfolio diversifier.

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