All that Glitters: Gold’s Run to a New All-time High

Markets are unsettled, uncertainty is elevated, and U.S. equities are suffering to start the year. But one asset is shining brighter than the rest: gold. The precious metal hit another all-time high this week, cresting the $3,000/troy ounce milestone. Gold is the best-performing asset year to date (of the major asset classes and equity sectors). While the policy uncertainty characterizing 2025 has given gold another leg higher, its strength extends back into 2024. Since the end of 2023, gold has returned 45%, more than doubling the return of the S&P 500.

The market environment of 2024 was different in many ways from that of 2025, yet gold’s appreciation continues. Gold is a bit like the kid in school who is “friends” with everyone, yet those relationships are fickle and fleeting. Historically, this asset has been driven by many factors, but the correlations change over time and are, in many cases, weaker than you may think. This makes it challenging to tactically allocate to gold. Those driving factors include 1) central bank purchases, 2) interest rates, 3) government debt levels and, inversely, the value of the U.S. dollar, 4) inflation, and 5) geopolitical and drawdown risk.

While challenging to disentangle exactly what is driving this part of the market, in our view, last year was a story of increasing central bank purchases, building expectations for Federal Reserve (Fed) rate cuts, and growing concerns about the U.S. debt trajectory. This year is more about a ramp up of inflation expectations, geopolitical uncertainty, and risk hedging.

Last year’s drivers

• Central bank purchases – Central banks globally have been increasing their gold reserves, with quarterly net central bank purchases since 2022 increasing at double the prior nine-year average (Figure 1). This has been driven by a trend toward diversifying bank balance sheets, de-dollarization, and other factors. In 2024, the National Bank of Poland was the largest purchaser of gold, as it works toward a 20% reserve allocation to the precious metal. This is likely to continue in 2025 before beginning to fade in 2026, in our view.
• Interest rates – Gold often exhibits an inverse correlation to interest rates. That is because gold is a non-interest-bearing asset, so as interest rates rise, so too does the opportunity cost of owning gold. Interest rates were volatile in 2024, but ultimately the Fed cut their policy rate a total of four times, helping boost gold’s return for the year. This year, with the exception of the very short end of the Treasury yield curve, rates have fallen, increasing the appeal of owning gold. Our view is that the Fed will cut rates more than the market is expecting. However, the long end of the curve is unlikely to fall much from current levels, unless we have a recession, so this may not be a meaningful tailwind to gold in the remainder of 2025.
• Fiscal state – At more than 7% of GDP, the U.S. is running one of the largest fiscal deficits we have ever seen in a non-recessionary peacetime. Over the past 12 months the U.S.’s unsustainable debt trajectory has been in focus for market participants, driving interest rate volatility in 2024 and contributing to U.S. dollar weakness. Gold and cryptocurrencies can be a hedge against persistent deficits that weaken the U.S. dollar and the Treasury’s borrowing capacity. Arguably, cryptocurrency has taken on more of a role of late as the foremost hedge against dollar debasement, but crypto continues to exhibit significantly higher volatility than gold.

Figure 1: Central banks have increased gold purchases

Global central bank net purchases (metric tonnes)

^{Data as of December 31, 2024. Data collected quarterly. Sources: World Gold Council, Metal Focus Ltd, WTIA.} 

This year’s drivers

• Inflation – Gold is a physical asset, which can make it an attractive hedge against inflation. However, the relationship is far from perfect because of gold’s relationship with interest rates mentioned above. If both inflation and interest rates increase also in tandem, gold’s inflation-hedging powers can be dominated by its yield culpability, particularly if economic growth is strong. This was made clear by gold’s paltry annualized return of just 2.7% during the 2021–2023 post-COVID inflation surge. Gold can be a more attractive hedge against stagflation—high inflation and low or recessionary growth conditions—which is more a concern today (though not our base case) given tariff uncertainty.  
• Geopolitical uncertainty – Gold is often considered the ultimate hedge against drawdown risk, geopolitical risk, and policy uncertainty. In reality, this precious metal’s effectiveness as a downside hedge varies. Gold can attract safe-haven asset flows during market drawdowns, but the relationship with volatility is spotty. There have also been plenty of geopolitical risk events in recent years that have not catalyzed a move in gold. However, the Trump administration is challenging the status quo on many aspects of international relations: trade policy, defense alliances, and arguably the post-World War II geopolitical world order more generally. Should this trend continue, we would expect to see gold continue to appreciate despite its historical record as a meager long-term investment (Figure 2).  

Figure 2: Gold at all-time high, but stocks have won handily over the long term

Return of $1 (since 1928) for the S&P 500 and gold, both adjusted for inflation

^{Data as of February 28, 2025. Sources: Bloomberg, WTIA. Inflation adjustment calculated using US CPI for urban consumers (NSA).}

Core narrative

Momentum for gold could continue given the drivers outlined above, but we would resist the temptation to chase what’s shiny and instead continue to hold a modest allocation to gold as part of our commodity (real assets) allocation. Gold miners within equities can also be a way of investing in gold, but the returns of gold miners do not perfectly track the price of the precious metal. Central bank buying and geopolitical uncertainty are probably the strongest tailwinds for gold going forward. Disinflation, stable interest rates, receding volatility, and potential resolution on geopolitical conflicts could limit gold’s gains from here. However, if we were to expect materially wider deficits and a weaker dollar, along with higher inflation and persistent volatility, it could become appealing to add to a gold allocation.

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