Gold has taken center stage in 2025, surging by 50% and outperforming major asset classes, driven by investors seeking safety amid global economic and geopolitical uncertainties. Key factors behind this rally include central bank purchases and the Federal Reserve's monetary easing, propelling gold to its strongest gains in decades.
This year, gold has recorded its most robust rally since 1979, when the Iranian Revolution disrupted the global economy. Since the start of 2025, spot gold prices have climbed 50%, surpassing returns from other major assets. Bank of America data suggests this momentum may persist, fueled by structural demand from central banks and the Fed's shift toward accommodative policy.
The Fed's policy pivot, announced by Chair Jerome Powell at Jackson Hole, comes at a critical juncture—weak employment data (a loss of 32,000 jobs in September) coupled with stubborn inflation signals a broader economic slowdown. Traditionally, U.S. Treasuries and the dollar served as safe havens, but waning investor confidence in the face of Fed challenges and global trade rebalancing has bolstered gold's appeal.
Geopolitical tensions in the Middle East and Eastern Europe further support gold's ascent, particularly as diplomatic efforts stall and the U.S. abandons its earlier optimistic stance on resolving the Russia-Ukraine conflict. The U.S. "One Big Beautiful Bill Act," signed into law this summer, has also pressured Treasuries by exacerbating fiscal concerns despite its pro-growth tax cuts.
Central banks, especially in emerging markets, have accelerated gold purchases since 2022—a trend reinforced when Russia’s FX reserves were frozen after its invasion of Ukraine. EM central banks, historically under-allocated to gold relative to developed peers (e.g., China’s reserves are below 10% vs. ~70% for the U.S. and major European nations), are now diversifying strategically. While summer buying slowed seasonally, 95% of surveyed central banks expect global gold holdings to rise over the next year.
Weakness in alternative hard currencies also drives demand. The USD/EUR spot rate climbed after France’s government collapse and credit downgrade, with the 10-year yield spread between French and German bonds widening to 86 bps—the highest since January. German 10-year yields rose to 2.73%, mirroring global sovereign debt trends amid political turmoil.
The Eurozone shows no signs of economic vigor, with ECB projections pointing to 1.2% GDP growth and stable 2.1% inflation. July’s trade surplus shrank to €12.4B from €18.5B a year earlier, led by declining chemical exports. The ECB has cut rates multiple times to 2%, aligning with muted inflation.
In Japan, the yen hit six-month lows after Sanae Takaichi’s election victory stoked fiscal spending fears. Takaichi criticized the BoJ’s tightening, but trade-driven slowdowns and export reliance leave policymakers trapped—hiking rates to curb inflation may stifle growth. Authorities are monitoring FX volatility, suggesting prolonged yen weakness may revive carry trades.
Sterling faces headwinds as the UK economy grapples with stagnant growth (0% July GDP) and persistent 4% inflation. The government may hike taxes to address deficits, while the BoE held rates steady in September. U.S. GDP growth is expected to outpace the UK (1.8% vs. 1.2%) despite trade policy disruptions.
In summary, gold has capitalized on the dollar’s deteriorating reserve currency status—weakened by U.S. fiscal and trade policies—while the euro, pound, and yen fail to offer credible alternatives in today’s turbulent markets.
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