Macroscope | Global uncertainty driving gold prices higher despite bubble fears

Goldbugs have a spring in their step these days. In the third quarter of this year, gold was the second-best performing major financial asset after silver, according to Deutsche Bank data. Last month, the price of bullion hit a record high 13 times and currently stands just above US$4,000 per troy ounce after surging 54 per cent this year, the biggest gain since 1979.

The past several years have been a boon to the yellow metal, whose role as a store of wealth is amplified during times of economic and political uncertainty. Gold has benefited from the post-pandemic surge in inflation and the recent decline in interest rates, which makes it more attractive to hold relative to income-producing assets. Moreover, bullion rises when the US dollar depreciates since it is priced in dollars and competes with cash.

The price of gold has soared around 120 per cent in the past two years. Although the precious metal generates no cash flow – veteran investor Warren Buffett famously dismissed gold as being “neither of much use nor procreative” – its hedging properties and liquidity are prized by investors when mainstream assets come under severe strain.

This is what makes the current bull market in gold so striking. Bullion’s blistering rally comes at a time when global stock markets are at record highs and corporate bond markets are priced for perfection. The Chicago Board Options Exchange’s Volatility Index, popularly known as Wall Street’s “fear gauge”, has plunged from 52 points just after US President Donald Trump unveiled his sweeping “Liberation Day” trade tariffs to just 16 points.

This suggests there is more to the gold rally than meets the eye. George Saravelos of Deutsche Bank said that although foreign investors are still buying US equities and bonds, they are hedging their exposure to the US currency so their investments are not affected by movements between the dollar and their home currencies. “Foreigners may have returned to buying US assets, but they don’t want the dollar exposure that goes with it,” Saravelos said.

Bullion is a big beneficiary of the “debasement trade”, which is a new buzzword in markets. According to JPMorgan, this reflects a combination of factors that include geopolitical and policy uncertainty, worries about inflation, fears about the sustainability of countries’ public debts and waning confidence in some fiat currencies.