June 9, 2025
“While geopolitical tensions, central bank demand, and retail perceptions of gold as a safe haven may drive near-term performance, we at GHPIA continue to maintain a disciplined, valuation-driven approach.“
Gold has long held a mythic status among investors—touted as: the ultimate hedge, the final store of value when fiat collapses, and the safe harbor in any financial storm. But in evaluating that claim with a rational perspective and historical data, one finds that gold’s role as a “safe haven” is often overstated and inconsistently realized.
The romanticism of gold often stems from its ancient use as currency and its physical tangibility in trade. In fact, most global currencies used to be backed by gold in some form, but over the decades, these standards were removed, as it was seen as a hindrance or impediment for governments to respond to a crisis with fiscal flexibility when needed. Modern financial systems are far more complex, automated, and digital today, yet gold still maintains a presence in today’s markets.
Recently, the price of gold has surged to all-time highs, raising a natural question: What’s behind the rally?
Like most commodities, gold’s price is shaped by a mix of factors including: real interest rates (interest rates adjusted for inflation), the U.S. dollar (USD) exchange rate (since gold is denominated in USD), supply and demand dynamics, and investor sentiment.
Historically, gold has often moved in the opposite direction of real interest rates (see Chart 1). Since gold doesn’t produce any income, lower real yields reduce the opportunity cost of holding it, making gold more appealing compared to interest-bearing assets like cash or bonds. This inverse relationship helps explain much of gold’s price rise since the early 2000s, as real yields have steadily declined, with many turning negative in parts of the world. However, starting in 2022, that relationship appears to have broken down. Real yields have increased, driven by the Federal Reserve’s efforts to tighten monetary policy and curb post-pandemic inflation, yet gold prices have continued to rise. If lower real yields are no longer the driving force, as the divergence in Chart 1 suggests, then another factor must be behind gold’s recent strength.
Since gold is priced in USD, a weaker USD tends to boost demand from foreign buyers, while a stronger USD typically weighs on gold prices. Looking at the DXY Index, a widely used measure of the USD’s value against a basket of foreign currencies, the USD has risen about 3% since 2022 (see Chart 2). Over the same period, despite bouts of volatility, gold has surged more than 80%. This divergence suggests that the recent rally in gold is not being driven by dollar weakness.
Approximately half of all the gold ever mined is still held as jewelry, which remains the largest source of demand, accounting for about 50% of annual consumption. Other major sources include private investors (through gold bars, coins, and ETFs), central banks, and industrial uses (see Chart 3). Because gold supply is fairly stable year-to-year, changes in price are more often driven by shifts in demand. With jewelry and industrial demand relatively steady over time, the more dynamic demand drivers have been private investment (shown in green) and central bank purchases (shown in yellow).
Private investment peaked in 2020 at 49% of total demand but declined to about a quarter in 2024. Flow data (money in vs. money out) from two of the largest gold ETFs, SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), show that retail investor demand tends to be sentiment-driven, with large inflows during periods of market stress followed by outflows once conditions stabilize (see Chart 4). While private investment still accounts for a meaningful share of demand, its reactive nature suggests it is contributing to gold’s rise, particularly in 2025 with positive ETF flows every month. Despite this, private investment is unlikely to be the primary structural driver of gold’s strength in recent years.
In contrast, central bank demand has grown meaningfully since 2021, rising from 11% of total demand to nearly one quarter for three consecutive years (gold bars in Chart 3). Notably, this rise in central bank buying, seemingly driven by institutions in emerging markets and authoritarian regimes, coincides with the period when gold prices began diverging from real yields. Their purchases have doubled compared to the average annual levels seen over the previous decade. Unlike retail investors, central banks are strategic buyers and generally less sensitive to price. Their motivations include diversifying reserves, reducing exposure to U.S. dollar assets, and protecting against the risk of asset freezes, as seen during the Russian invasion of Ukraine. As such, given the timing and scale of this shift, there is strong evidence that central bank demand is the main force behind gold’s recent surge.
Despite the recent momentum and headlines, we remain unconvinced by gold’s investment case. While geopolitical tensions, central bank demand, and retail perceptions of gold as a safe haven may drive near-term performance, we at GHPIA continue to maintain a disciplined, valuation-driven approach. Central banks are typically indifferent to price, buying for reserve diversification or geopolitical motivations rather than based on valuation. Meanwhile, the marginal cost of production provides little meaningful anchor for gold’s current price.
Though visually appealing, gold remains an unproductive asset. It generates no income, derives its value largely from sentiment and price-insensitive buyers, and functions poorly as a medium of exchange, even in times of crisis. Its track record as an inflation hedge is inconsistent, and its geopolitical rallies are usually short-lived and driven more by fear than fundamentals.
While gold may play a narrow role in extreme scenarios, diversified portfolios of equities focused on fundamentals, valuation, and stability have historically recovered faster and delivered far superior longterm results. At GHPIA, we favor evidence-based investing in productive assets like U.S. stocks that drive innovation and compound wealth over time.
Top Row L to R: Brad Engle, Mike Sullivan, Sebrina Ivey, Christian Lewton, Jason Kitner
Bottom Row L to R: Carin Wagner, Angela Kennedy Lee, Jenny Merges, Brian Friedman, Deirdre Mcguire, Barbara Terrazas, Reed McCoy
