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IN THE CITY of London, the queue outside a jeweller that also sells bullion stretches down the street. In Tokyo, banks have suspended sales of small gold bars, unable to keep up with demand. At the Royal Mint, which produces Britain’s coins, sales of gold and silver have hit record highs. Meanwhile, the price of the yellow metal has soared to an all-time nominal high of over $4,100 per ounce, up by more than 55% so far this year. The last time gold had such a good run, the Soviet Union had just invaded Afghanistan and Margaret Thatcher had recently moved into 10 Downing Street.
Today’s gold rush is a global phenomenon, driven as much by pension funds in Frankfurt as by peasants in rural India. It is a bet on many things at once: geopolitical instability, stubborn inflation and, most of all, a deep-seated fear that the rich world’s fiscal chickens are coming home to roost. Investors are not merely seeking a hedge. They are preparing for a world in which the foundational promises of modern finance—that government debt is safe and that fiat currencies hold their value—begin to look rather shaky.
Start with the most obvious, and most novel, source of demand: central banks. Since 2022 monetary authorities in emerging markets have been buying gold at a breakneck pace. Their motivation is a desire to diversify away from American assets, especially Treasury bonds, as geopolitical tensions mount. According to the World Gold Council, an industry group, central banks’ holdings of the metal now surpass their holdings of American government debt. Gold’s share of global central-bank reserves has leapt from 10% a decade ago to 24% today. This is not a short-term tactical shift, but a long-term strategic one. It has created a structural bid for gold that did not exist during previous bull runs.
Yet it is the behaviour of investors in the West that has turned a steady climb into a parabolic rally. Their logic is simple, if alarming. “It’s a fear of financial Armageddon,” says David Tait, head of the World Gold Council. Consider the fiscal outlook for advanced economies. The average debt-to-gdp ratio in the rich world is about 110%, near its record high. Despite healthy economic growth, deficits remain enormous: America’s will exceed 6% of gdp this year, and the average for rich countries is more than 4%. Servicing this mountain of debt has become painfully expensive. Last year for the first time in modern history, rich countries collectively spent more on debt-service costs than on defence. And the bill is still rising.
After a series of interest-rate rises to combat inflation, governments must now refinance trillions of dollars of debt that was issued when rates were at historic lows. America alone must roll over debt worth a quarter of its gdp by 2027. The result is a vicious circle: higher rates lead to higher debt-service costs, which in turn mean larger deficits, which in turn require more borrowing, which can push rates up further. The bond market is already flashing warning signs. Long-term yields are rising even as central banks begin to cut rates again. Britain’s 30-year borrowing costs are at their highest since 1998; Japan’s are at a record high; France is forced to borrow at rates similar to Italy’s (historically known for fiscal indiscipline). Investors are demanding a higher risk premium for holding rich-world government debt, a remarkable state of affairs in supposedly safe assets.
Nor is relief in sight. The imf estimates that ageing populations, climate transition and defence build-ups will create additional annual spending pressures worth 6% of gdp in Europe by 2050. In some countries such as Britain and Spain, the figure is more than 8%. To close its own yawning fiscal gap, America would need to raise taxes and cut spending by an amount equivalent to 15% of gdp. There is no political appetite for such austerity. Instead investors fear that governments will resort to the oldest trick in the book: inflation. “The debasement trade is back in vogue,” says a portfolio manager at a large European asset manager. “Gold is the ultimate non-fiat asset.”
This explains why gold has rallied even as other haven assets, such as Treasury bonds, have struggled. It also explainsw why the current rally has been accompanied by strong demand for Bitcoin, a digital claimant to the title of non-fiat money. But gold is bigger, more established and, for now, more liquid. It is also getting a boost from interest-rate cuts, when they come, since they reduce the opportunity cost of holding an asset that pays no yield. Markets are pricing in as many as four cuts from the Federal Reserve by the end of 2026.
Add a dose of political dysfunction and the cocktail becomes even more potent. In America both parties have embraced deficit-funded policies, from Trump’s recent tax cuts to Biden-era industrial subsidies. Donald Trump and his allies are pressuring the Fed to keep rates low, undermining its inflation-fighting credibility. Around the world the gold price is, in effect, a barometer of distrust in the ability of governments to manage their finances.
Is the rally overdone? In the short term, almost certainly. Bank of America’s latest fund-manager survey finds that “long gold” is one of the market’s most crowded trades. The metal now trades 20% above its 200-day moving average and 70% above its 200-week one—ahead of even the spike during the covid-19 pandemic. Such heady valuations have historically been followed by nasty corrections.
Yet the structural drivers of demand look strong. Central banks are unlikely to reverse their buying spree. Western governments show no sign of mending their free-spending ways. Geopolitical tensions are not abating. Analysts at Société Générale, a French bank, think $5,000 gold is now plausible. That would require the stars to align perfectly for the metal. But in an era of fiscal incontinence and political gridlock, the stars seem to be doing just that. Investors are not buying gold because they believe in its glitter. They are buying it because they believe in little else. ■