IMAGE: BLOOMBERG
IT IS NOT just another record. When the price of gold briefly touched $5,115 a troy ounce on January 26th, it confirmed that the metal is in the grip of something extraordinary. Last year it rose by 64%, its best performance since 1979. So far this year it has added another 17%. Such heady heights invite talk of a bubble. Yet the rally feels different. It has shrugged off what were once powerful headwinds, from high real interest rates to a strong dollar. Its momentum springs, rather than from speculative fever, from a growing distrust in the foundations of global finance. The question then is not what is driving gold up, but how much further it can climb.
The metal’s latest surge has left many seasoned observers scratching their heads. Traditionally gold falters when interest rates are high, because it offers no yield and thus becomes less attractive when cash does. Yet even with real rates still positive in America, the metal is soaring. Its behaviour suggests something more unsettling is afoot. Gold is being revalued as faith in other stores of value drains away.
Investors have plenty to fret about. Global debt has ballooned to $340trn, more than three times the world’s annual economic output. America’s fiscal path looks unsustainable with its government now spending more on debt-service than on defence. In Japan the bond market is in revolt over the policies of Sanae Takaichi, the prime minister, pushing up yields and triggering a retreat by Japanese investors from foreign assets. Central banks are again finding reasons to create money: the Federal Reserve has restarted a programme to buy Treasury bills, a form of stealth easing. All this is backdrop to a roiling geopolitical scene, from recent military strikes in Venezuela to a spat between America and the European Union over Greenland.
In such an environment, gold’s old logic has flipped. “The opportunity cost of holding gold is not measured against Treasury yields any more,” says Ross Norman, an analyst. “It is measured against the risk of holding government paper itself.” When investors fear that the value of their bonds or their dollars might be eroded by financially stressed governments, a lump of metal with no counterparty risk starts to look appealing, even if it pays no interest. This is the “debasement trade” in a nutshell.
Two developments give this surge a more durable feel than previous flares in the gold price. First, demand is becoming institutionalised. Last year Chinese regulators allowed big insurance firms to put 1% of their assets into gold. Given the sector’s heft, that could mean more than $50bn of buying. India has opened its national pension system to gold investments. These are not speculative bets but strategic allocations, creating a solid floor of demand.
Second, central banks have become relentless buyers. Their purchases hit a record in 2025 and show no sign of slowing. For many, that is a form of de-dollarisation—a shift out of American assets that is as much about geopolitics as economics. European allies, unnerved by the volatility of American trade policy, are joining the long-time sceptics, Russia and China, in seeking alternatives to the greenback. Gold is the obvious candidate.
On the supply side, the market cannot easily answer this call. Global mine output has been stagnant for years. New projects are rare, snagged by environmental rules and community opposition. The last big gold mine to open in America did so more than two decades ago. Recycling of old jewellery has increased, but not enough to close the gap. In the short term, therefore, prices must do the balancing.
How high could they go? Banks are busy scribbling up new projections. Bank of America is among the most bullish, envisaging $6,000 by spring. It notes that the average big gold rally of the past half-century produced a 300% gain; from its low in 2022, the metal is up by less than 200%. Goldman Sachs is more cautious with a target of $5,400 by the end of this year. The technical analysts at SAMCO, a brokerage, spy a Fibonacci pattern that points to $7,040. Such precision is fanciful, but the direction of travel is clear.
Any of several events could puncture the rally. If America’s fiscal picture brightened, or if geopolitical tensions ebbed, some of gold’s safe-haven appeal would vanish. Higher real rates in America would also hurt. So too would a sudden rush of scrap gold to market from holders looking to cash in. For now, though, the forces pushing gold upward are strong and structural. Its break past $5,000 may be a milestone rather than a peak. ■
