Gold: the shiniest asset
We examine the dynamics that have led to the gold rally, as well as the factors that influence the gold price in both the long and the short term, most notably the role central banks play in purchases of this precious metal.
2024 was a record year for gold. The interest rate cuts in the US and the geopolitical tensions led both central banks, especially in emerging economies, and investors to intensify their demand for gold during the second half of the year. This preference for security, or the lower risk of gold, caused the price per ounce to surge by 27% in the year. To date, in the first four months of 2025, most of the dynamics that fed that rally either remain in place, such as the expectations of further rate cuts by the Fed, or have intensified, such as the geopolitical risks linked to Donald Trump’s tariff policy. As a consequence, the total demand for gold has continued to grow,1 largely driven by increased investment in gold (whether in the form of ETFs,2 bars or coins), and this has allowed the price to reach 3,500 dollars per ounce.3
- 1. According to data from the World Gold Council (WGC), in Q1 2025 the total demand for gold grew by 40% compared to Q1 2024.
- 2. Gold ETFs (Exchange Traded Funds) are funds that are listed on the stock market which replicate the price of gold and allow investors to obtain exposure to gold without having to purchase or store physical gold.
- 3. During the session of 21 April 2025.
Before delving into the causes of the current gold price rally, it is worth pausing to identify which theoretical factors determine prices of this precious metal. In the long term, on the demand side, wealth and disposable income play a key role: institutions and individuals invest in gold, while consumers spend a portion of their income and their wealth on jewellery and technology products that contain gold. On the supply side, aspects such as mining production and gold recycling, the availability of natural reserves and environmental factors also influence prices.
However, it is shorter-term factors that play a bigger role when it comes to determining the return, or the price, of gold. These include macrofinancial factors such as foreign exchange rates, the relative value of assets and the level of risk aversion in the financial markets, which introduce greater volatility relative to its long-term determining factors. The first is the so-called opportunity cost of currency: the price of gold is denominated in dollars, and when the dollar weakens, gold becomes more affordable for holders of other currencies (see first chart). The second factor is the opportunity cost of interest rates: the presence of gold in investment portfolios is partly due to its expected future return relative to other safe assets, such as US Treasury bonds. The interest rate yield of these bonds, particularly in the case of 10-year Treasuries, is closely and inversely correlated to the gold price. The third element is linked to gold’s consideration among financial investors as a safe-haven asset. Therefore, its demand increases significantly when the market’s perception of risks regarding economic growth and geopolitics is greater.
If we consider these factors in the current context, it is clear that they have supported the increase in the demand for gold and, therefore, the increase in its price. Donald Trump’s arrival in the White House, with the introduction of tariffs and an erratic and unpredictable economic policy, has raised fears of a possible economic recession in the US. This, in turn, has been reflected in a weakening of the dollar and has fuelled pre-existing geopolitical unease, triggering an episode of significant tension in the financial markets. The heightened volatility and the risk aversion in such an uncertain environment have led many investors – both institutions and individuals – to choose to diversify their portfolios towards a safe-haven asset such as gold, driving up its price and attracting new investment flows, as reflected in the Gold Return Attribution Model of the World Gold Council (WGC) (see second chart).
For centuries, gold has been considered a safe asset in times of political and economic uncertainty, offering its holder a sense of security due to its nature as a high-value product that can be easily transported. However, today’s investors prioritise the liquidity and stability that this asset provides rather than its intrinsic utility.
In 2024, the demand for gold as an investment asset reached 90.6 billion dollars, a record level surpassed only in 2020, when the economic crisis triggered by COVID-19 caused a surge in investment in safe-haven assets, and the level of investment reached 102 billion dollars. The data on investment in gold during Q1 2025 indicate that the trend remains upward, not only in monetary terms but also in physical terms,4 with the demand in volume reaching a peak since the outbreak of the war in Ukraine in 2022. In this regard, in addition to the strength of demand for physical gold, mostly in the form of bars, investment through gold ETFs has also increased significantly. The flow of investment towards ETFs has remained positive for 10 months in the last year, and according to data from the WGC it reached 20.8 billion dollars between January and March. This increase will have been favoured by the appeal sparked by the rise in gold prices itself, as well as by fears of a recession in the US, volatility in the stock markets and investors’ expectations of possible interest rate cuts by the Fed and the ECB.
- 4. In Q1 2025, the demand for gold for investing stood at 552 tonnes, 170% more than in Q1 2024.
The importance of gold in central banks’ foreign reserves is due to its role as a long-term store of value, as an alternative to the major currencies and without any credit risk. This is why, since 2010, central banks have increased their gold positions and are net buyers. However, the rate of their purchases has doubled since Russia’s invasion of Ukraine, particularly in the case of emerging economies. In the last few quarters, the highest demand for gold has come from the central banks of Poland, China, Kazakhstan, the Czech Republic and India. In this regard, the market views the purchases by central bank of China (PBoC) with some concern. At the beginning of 2025, it was estimated that the Chinese monetary authority’s foreign reserves amounted to around 3 trillion dollars, of which 5.9% was in gold. If we put this percentage in perspective, and in order to understand the significance of the PBoC’s actions, if it were to decide to increase this percentage to, say, the level of holdings of India’s central bank (9%), this would generate additional demand of approximately 15,000 tonnes of gold, equivalent to around 30% of the total global demand for gold in 2023.
In short, the uncertainty dominating the current global economic and political outlook appears to be acting as a tailwind for the demand for gold to remain strong. However, major changes in international geopolitics, such as an end to the war between Russia and Ukraine or greater clarity regarding the US’ trade policy, could lead to an easing of the buying pressure on gold on the part of investors.
- 1. According to data from the World Gold Council (WGC), in Q1 2025 the total demand for gold grew by 40% compared to Q1 2024.
- 2. Gold ETFs (Exchange Traded Funds) are funds that are listed on the stock market which replicate the price of gold and allow investors to obtain exposure to gold without having to purchase or store physical gold.
- 3. During the session of 21 April 2025.
- 4. In Q1 2025, the demand for gold for investing stood at 552 tonnes, 170% more than in Q1 2024.
