Record high prices of gold: What investors need to know

There are four traditional drivers to the price of gold. First, it can act as a hedge against inflation, as it tends to maintain its value when the purchasing power of a dollar decreases. Second, lower real interest rates increase gold’s attractiveness by reducing the opportunity cost of holding it compared to interest-bearing assets. Third, a weaker U.S. dollar typically elevates the prices of hard assets priced in dollars, such as gold. And fourth, it’s been a trusted store of wealth for thousands of years, and so periods of perceived crisis can accentuate its appeal. All four of these factors are now present in the market.

After the 2022 invasion of Ukraine, Western sanctions froze roughly $300 billion of Russian state assets. This exposed vulnerabilities in holding politically sensitive assets and underscored the importance of expanding reserves beyond U.S. dollars and U.S. Treasuries. Gold was a key beneficiary. In 2023, central banks purchased 1,037 tonnes of gold. In 2024, central banks collectively added another 1,045 tonnes. This was the third consecutive year of net purchases surpassing 1,000 tonnes, illustrating a clear strategic shift towards gold as a secure and neutral reserve asset.

Central banks are also increasingly starting to question America’s leadership role in institutions integral to the global financial system and trade relations. The very foundations that support the U.S. dollar as a reserve currency. As a result, central banks are pivoting away a little from U.S. dollars and into assets like gold.