The Rise of Gold: Geopolitical Sentiments Reshaping Its Future

by Erin D John & Alvira Khan

Introduction

Gold is a precious metal that, for centuries, has not ceased to amaze civilisation. Historically, gold, known for its scarcity and durability, served greatly in trade and global finance, ensuring economic stability through systems like the gold standard. While gold no longer supports major currencies, it serves as both a commodity and a financial asset, drawing investments from various institutions and individuals who use it to hedge against economic uncertainty. Unlike paper money, gold’s attractiveness lies in its ability to hold value over time, irrespective of market volatility or geopolitical shifts.

The Gold Market

Gold prices fluctuate based on demand and supply parameters. As of 2023, supply has split between mining production (75%) and recycling (25%). On the other hand, the demand for physical gold comes from various sectors such as jewellery (49%), central banks (23%), financial investors (21%), and electronics (7%). According to the World Gold Council, China is the leading producer of gold, while the US holds the largest gold reserves. Meanwhile, India and China hold over 50% of the gold jewellery market. Since gold is also a financial asset, its price is highly sensitive to economic indicators such as inflation, interest rates, currency fluctuations, and global uncertainty. The graph below depicts the pattern and trends of gold prices.

In the 1980s, the oil crisis and hyperinflation drove the price of gold to $850 per ounce (the highest in real terms). However, this peak was short-lived as by 2000, the Federal Reserve’s tightening policies, including higher interest rates, lower inflation, and a strengthened dollar, steadily lowered gold prices to $350.72. During this period, gold was viewed as a non-essential asset due to higher growth in stock market activity and a lack of a major economic crisis, and the UK government especially sold a good portion of its gold reserves (at a record low price of $250). In the 2000s, however, gold started to become more of an asset, driven by the dot-com bubble, the 2007 financial crisis, and the Russian-Ukraine annexation in 2014. These events led the central banks to hoard gold, and the quantitative easing signalled currency devaluation, thus driving market fear. A short-lived decline in the gold price of $1185 was observed during the post-crisis period of 2013-2015 before the bull rally began from 2018-2025. This is evident as geopolitical uncertainty (Brexit, Covid-19, Russian-Ukrainian war, and unrest in the Middle East), central banks stockpiling gold, banking crisis, and stock market volatility drove gold prices to reach $2858 by 2025 (a percentage increase of 86.46% since 2022).

Gold Price Surge

In recent times, we have witnessed a surge in gold prices worldwide. Although we would love to believe that the reason for this is the popularity of gold jewellery, the truth is far from it. Central banks are now engaging in a “gold buying spree”. The trend has been increasingly prominent since the freezing of Russian central bank assets following the Russia-Ukraine war in 2022. The COVID-19 pandemic, the multiple ongoing wars across the world, and the political instability surrounding the US dollar have become backseat drivers of the gold price. According to analysts, gold purchases will continue to increase in the future as well. China’s central bank resumed its gold purchases after a 6-month pause, further proving that world governments are probably looking towards a more stable asset amid escalating geopolitical tensions. One must keep in mind that, as explained in the above section, a persistent hike in the inflation rates drives gold prices; however, the current inflation rates and the corresponding trend in the gold price increase do not conform to that principle.

Central Bank Gold Reserves

As mentioned, due to multiple crises since the 2000s, buying gold has been a priority for the central banks. The following plot shows the results of their gold purchases. The US is leading the tally with 8100 tonnes of gold, followed by the Western European nations and China. The former group of countries were traditionally the largest buyers, and that trend has changed in the recent past, handing over the baton to China and India, among others. This growth in gold purchases is also widely seen in Eastern European nations, such as Poland (42.33 tonnes) and Hungary (15.52 tonnes) pulling into their reserves.

Gold has an inverse relationship with the US dollar, thus making it more appealing as an asset that can increase the diversification of a central bank’s portfolio. Given the speculations regarding the dollar, this practice by the central banks is more reactionary than ever. The table below is a consolidation of the factors with the highest potential to affect gold prices in the present scenario.

Is gold a perfect hedge?

In the late 90s, the availability of various attractive financial investments steered the world away from gold. However, after years of understanding its resilience and ability to withstand crisis after crisis, we are once again at a juncture where instabilities in the geopolitical sphere are pushing central banks, governments, and investors alike towards gold. Going overboard with any investment is harmful, and the growing trend of giving gold an insurance-like stature should be taken with a pinch of salt, especially considering the brutal reality that the very people causing these tensions are the ones with the largest reserves of the ‘gold insurance policy’.

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