How gold became one of the world’s hottest investments

“There is also interest in exploring possible alternatives to the dollar-based payments system that has been at the core of the international architecture for some 80 years.”

Russia has had some success with this, as it’s managed to navigate its economy away from a full-fledged downturn after the US imposed wide-ranging sanctions in 2022.

Russia’s ability to steer its de-dollarized economy away from a crisis could give other countries confidence to lessen their dependence on the dollar, which ultimately benefits gold.

“What is at stake here is not just the erosion of the dollar’s dominant role but also a gradual change in the operation of the global system,” El-Erian said. “As it develops deeper roots, this risks materially fragmenting the global system and eroding the international influence of the dollar and the US financial system.

Gold is considered a safe haven asset due to its long-standing history as a stable store of value.

So when geopolitical tensions rise, investors tend to flock to the shiny metal, and right now, there is no shortage of reasons to be worried.

From Russia’s war against Ukraine to the escalating clashes in the Middle East to China’s long-running threat against Taiwan’s independence, geopolitical tensions are rising, not falling.

What’s more, soaring US debt means that Treasurys—another historical safe haven asset—might not be so risk-free anymore.

“Gold looks to be the last ‘safe haven’ asset standing, incentivising traders including central banks to increase exposure,” Bank of America said in a note this month.

The Trump trade has picked up steam recently as the former president’s odds of winning the election have risen, and gold has been a big beneficiary.

That’s because a potential Trump presidency is expected to be accompanied by a soaring government deficit and a fast-growing pile of debt, which would further drive concerns about a rebound in inflation and the sustainability of the US dollar.

“If you’re worried about fiscal profligacy, financial repression, and attacks on Fed independence, gold would be an attractive asset,” economist Davix Oxley of Capital Economics said on Friday.

Even if Trump doesn’t win the election, the deficit is likely to grow, setting gold up well for more gains, according to Interactive Brokers chief strategist Steve Sosnick.

“It’s not as though either candidate is preaching fiscal discipline, and the Fed seems willing to keep cutting even if inflation remains a bit above target. So there is a thought that gold could be a viable alternative if rates rise and the economy remains sound. And if the economy isn’t sound it could still be a good store of value,” Sosnick told Business Insider.”

According to data from the World Gold Council, falling interest rates have historically benefited gold prices, with the commodity rising as much as 10% in the six months after the Federal Reserve’s first rate cut.

With the Fed expected to cut interest rates multiple times over the next year, lower rates should serve as a tailwind for gold prices.

While interest rates actually jumped since the Fed’s first rate cut last month, with the 10-year Treasury yield hitting its highest level since July this week, gold prices have continued to rise.

That’s a sign that gold investors are more focused on the global interest-rate path, which is pointing lower as global central banks look poised to loosen monetary policy.

The People’s Bank of China cut rates by 25 basis points this week, while the Bank of Canada cut by 50 basis points. The European Central lowered rates by 25 basis points last week, and economists say they see the Bank of England set to deliver bigger rate cuts than previously expected by markets.

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