Just recently, the price of an ounce of gold hit an all time high of 3,659 dollars. That represents a 47% gain in just one year. Calculated as an average, an investor who had bought in around the turn of the millennium at roughly 290 dollars an ounce would have earned an annual return of about the same size –every year (!) up to today. Since then, the price has more than twelve-fold. In particular, since gold last traded below 2,000 dollars an ounce (31.1 grams) in February 2024, it has risen steeply, swelling the ranks of the gold bulls – true to the maxim: „The trend is your friend.“ Thus, the rally is feeding on itself, to quote another market adage. In the current euphoria, price targets of 5,000 dollars and beyond are already being discussed. Such exuberance should give investors pause, even if the supportive backdrop for the metal is unlikely to shift any time soon.

The main drivers of the gold rally are no secret. In the short to medium term, trade and tariff disputes are weighing on growth across much of the Western world, adding to general economic uncertainty. Wars in Ukraine and the Middle East, along with other geopolitical tensions, are further stoking fears. This climate of political and economic insecurity underpins gold’s reputation as a crisis-proof investment. In addition, sluggish growth in major economies and persistent question marks over corporate earnings make gold – though it yields no profits or interest in physical form – look more attractive.

Memories of the sharp price increases in 2022 and 2023 are also still fresh. With gold long regarded as a hedge against inflation, the renewed surge in living costs has triggered another flight into the yellow metal. A weak dollar is providing further momentum, since gold tends to move inversely to the US currency. This combination makes gold appear perfectly positioned as a supposedly safe, value-preserving asset. Investors buying on this basis are acting tactically – yet if economic and political tensions ease, they are likely to rotate back into other assets such as equities and bonds, putting downward pressure on the gold price.

A different group of gold investors, however, remains loyal to the metal – those with a penchant for doomsday scenarios. Their concerns are not unfounded: decades of ultra-loose monetary policy, mounting debt and fiscal mismanagement weigh heavily. Unlike tactical buyers, these investors expect at least a partial collapse of financial markets and a return to the gold standard – a system in which each currency unit is tied to a fixed quantity of gold. While it constrains central banks’ room for maneuver, the system promises stability, particularly for exchange rates, and shields against inflation.

Those who have bought gold on such grounds will continue to argue – even in the event of a sharp correction – that a return to gold-backed currencies is inevitable, given the inability of governments and central banks to reverse course on fiscal and monetary policy. And such a move is not purely hypothetical. In July 2024, the BRICS nations – Brazil, Russia, India, China and South Africa – announced plans to launch a new gold-backed currency. That may help explain the surge in central bank purchases in recent months. Central banks today hold roughly one-fifth of all the gold ever mined.

As troubling as it may be, these procyclical purchases by central banks play straight into the hands of the doom-mongers and prophets of collapse.