Can Gold Push Through USD 3,000 And Beyond?

The number 13 tram in Zurich winds its way through the centre of the city before turning and pushing uphill to the Uetliberg. The inhabitants of the tram are typically older people and bank employees, but occasionally you might come across a few excited, wealthy individuals journeying to look at their gold in the Credit Suisse (now UBS of course) building at Uetlihof. The entrance to the building is on the 8^th floor, betraying a deep underground complex where it is said, the bank stores gold bars, and sometimes invites the owners of the gold to view their stash.

Those investors who own gold will be very happy. It has returned 40% in the past two years and is now closing in on the USD 3,000 level, despite a stronger dollar and high interest rates.

There are few assets like gold. The vast majority of investors do not hold it, nor have they a sense of how its price behaves. But there are others who are passionate about gold and hold large quantities of it in their portfolios. Finance theory suggests investors should hold 2% of gold in a portfolio, but my experience is that in practice, it is either 0% or greater than 10%. To that end gold is a ‘Marmite’ asset class, because like the Marmite spread, you either love it or hate it.

It used to be that a difficult interview question for graduates was to ask them what the drivers of the gold price are. Now that question is more likely to focus on the drivers of bitcoin. Bitcoin’s architects likely wanted it to behave like digital gold, but instead it seems to trade like digital Nasdaq futures on steroids.

The gold price has perhaps three drivers – the role of gold as a monetary variable, the effects of commodity or physical demand and its role as a store of value in times of crisis.

Typically gold as a ‘rival’ for paper money is driven by changes in the monetary environment – namely the value of the dollar and medium-term interest rates. For example, from the early 2000’s onwards the price of gold has moved inversely with the inflation adjusted yield on ten-year US bonds (rising bond yields tend to be bad for gold). But, in 2022, something funny happened – inflation adjusted bond yields rose, but gold kept rising and has not stopped since. Indeed, I now see more and more financial headlines that ‘gold is breaking out’, which is likely a sign that the ‘top’ is not far away.

The strength of the gold price is curious because in many quarters demand for gold has been muted – according to the Banque de France, demand for gold is made up of jewelry (49%), central banks (23%), financial investors (21%) and the electronics sector (7%).

In 2024, Chinese and Indian households have been buying more gold, and before that, emerging economy central banks – notably Russia and South Africa had been buyers, most probably to diversify out of dollars and euros given the risk of sanctions and asset confiscation. Financial holders of gold, exchange traded funds (ETF’s) have not been heavy buyers. Overall though, commercial and financial demand for gold has not been dramatically strong in the past eighteen months.

That still leaves a big chunk of gold’s outperformance unexplained (if it were only driven by the interest rate environment gold would likely be trading close to USD 2,000 given the stubbornness of high bond yields). There are likely two factors at play.

The first is technical. There is a short squeeze taking place in the gold market, which means that a lot of financial actors (bullion banks and speculators) have short positions in gold (hoping that the price will go down) and now have to buy gold to cover loss making positions. This short-squeeze is exacerbated by a spike in demand for physical gold because of fears of tariffs on gold and silver (from Canada – home to many gold miners).

The second factor that is more interesting and harder to calibrate is geopolitics. Gold is a pure store of value – an asset to run to when the world is turned upside down. For those who live adventurous lives, a belt with gold coins sown in is a good escape plan (I have met at least one person with this plan). In a week where the global security architecture has been dismantled by the Trump administration, the reasons for holding gold are clear.

The disintegration of relations between the US and China, the uncertainty caused by tariffs and generally weak government finances across the G2 and G7 countries are just a couple of more detailed reasons to own gold. In that sense it is a barometer of ‘Trump’s world’, but also highly susceptible to his actions – he could send gold much higher if he announces tariffs on gold, but the prospect that he could let Russia off the financial hook as it were, is a reason to call the top.