Gold has risen above $3,000 and forces appear set to underpin the yellow metal. The editor reflects on what its behaviour says about economic and geopolitical conditions.

When a “safe-haven” asset such as gold breaks above a round number – $3,000 per ounce, which is what happened on Monday this week – it triggers thoughts on whether a wider “vibe shift” is happening in finance. 

As we noticed a few days ago, several wealth managers such as UBS and Pictet in Switzerland, and DWS, the German firm (see examples here, here and here, respectively), have been positive on gold for its hedging qualities. 

Gold is getting more attention and, if certain forces continue, this will intensify.

In a note in February, Paisan Limratanamongkol, head of strategic asset allocation and quantitative research, Citi Private Bank, cautioned that recent price rises in the yellow metal haven’t always followed traditional patterns. Even so, the comments contain enough to make one wonder whether gold can keep its ascent.

What Limratanamongkol observed was that “in one of its most consistent relationships, gold has typically moved in the opposite direction to the US dollar.” The writer goes on to note that the US Dollar Index [an index of the dollar’s value against several currencies] is higher today than it was in 2018, which might have been consistent with weaker gold, but that’s not the case this time. Even so, one relationship that might hold more robustly is that gold tends to rise when the geopolitical environment is uncertain – as it is now. “In the last decade or so, uncertainty has persisted at higher than customary levels, and gold has kept registering gains,” Limratanamongkol wrote. Another positive force comes from central banks and retail investors.

Dollar under a cloud
US equities have taken a beating (the S&P 500 Index is down 4.6 per cent since early January) amid worries about President Trump’s pro-tariff policies, as well as how he appears to want lower interest rates and a lower dollar exchange rate: this bodes well for gold. 

Related to this is the debate that has gone on as long as I’ve been a financial journalist (30 years) as to whether the dollar’s status as the pre-eminent global reserve currency is in danger. Admittedly, predictions of its demise have been, in Mark Twain terms, much exaggerated. Those who have bet on that demise have been left looking foolish. 

But maybe this time it is different. Benjamin Dubois, the head of overlay management at Edmond de Rothschild Asset Management, thinks that the Trump administration wants the dollar to depreciate significantly. 

Dubois pointed out that since 2008 and the subprime crisis, the Dollar Index has risen more than 40 per cent, with just a few episodes of weakness (only four bearish years in the past 15). “But over the past few days, weakening fundamentals have sent the dollar into a downward correction. The recent economic data for the US, which came in below expectations, and concerns over the country’s technology sector, has raised doubts over the resilience of the American economy,” he said. 

And Dubois writes that Europe’s move to step up military spending significantly, filling an expected gap left by a US retreat from European military engagement, boosts perceptions of the eurozone economy in growth mode, and this weighs on the dollar exchange rate. The Dollar Index has fallen more than 4 per cent since early January. 

“While the impact of these factors is already considerable, Trump’s trade war and his plans to restructure the global financial system are putting the dollar at even greater risk, Dubois said. And he refers to how S Miran, a Trump senior economic advisor, thinks the US currency must depreciate to bring industry back into the US, working alongside the tariff policy. 

Debt woes
A desire to weaken a reserve currency to this extent raises urgent questions about how the US can go on servicing $36.2 trillion in public debt, at a debt-to-GDP ratio of 120 per cent. The US, as President Trump will have been made aware, spends more on servicing that debt than on defence. According to data from the House Budget Committee, that increase in spending on interest surpassed defence for the first time last year; it is also higher than Medicare and Medicaid. 

Maybe some of the worries that fuel the gold price are due to whether policymakers, both on the Republican and Democrat side, have the intestinal fortitude to balance the budget books and rein in debt without crippling rises in taxes. Given the political dynamics of an ageing population, this is a tough call. And these issues aren’t peculiar to the US, of course. Much of Western Europe is in a similar bind.

Gold does not – so the conventional argument goes – produce a yield. (There are businesses that argue that lending in gold and being paid for it does produce a yield, as the US-based firm Monetary Metals argues here.) Gold has been a medium of exchange for thousands of years; even the more recent phenomenon of bitcoin is a sort of tribute act to the idea of a monetary medium based on a scarce resource, rather than something that a central bank can print whenever it thinks fit. Even so, debates continues on whether gold could ever displace fiat currencies or win back more of a mainstream place in the way we handle money. It is easy to see why gold is shining.

As ever, the point from Citi Private Bank’s Limratanamongkol seems a wise place to end: “While fraught with uncertainty, taking a controlled and managed approach is still better than allowing feelings and beliefs to guide one’s approach to seeking a portfolio allocation to gold.”