In addition to governments and central banks, most of the gold demand comes from investors who use gold as a hedging tool against economic and political instability.
Gold is scarce. Throughout human history, only about 219,890 tons of gold have been mined from the ground, while silver is mined at about 1.7 million tons, and other commodities such as coal and iron ore are up to billions of tons. This scarcity is one of the reasons why gold is considered a place to store value for thousands of years.
Previously, many countries had applied the "gold asset" regime, meaning that the value of the currency was anchored to gold. This meant that governments could not print more money without corresponding gold reserves. This mechanism helped curb inflation. However, the US abandoned the gold asset in 1971.
Since then, the USD has lost about 90% of its purchasing power in the past 50 years, thereby contributing to pushing up gold prices in USD terms. Therefore, although gold does not generate revenue or profit like businesses, this precious metal is still considered an effective defense tool against the risk of devaluation of paper money.
In fiscal year 2025 (ending September 30), the US government recorded a budget deficit of 1,800 billion USD and is on track to continue to have a deficit of more than 1,000 billion USD in fiscal year 2026. As a result, US public debt is currently approaching the threshold of 40,000 billion USD.
Paul Tudor Jones - a famous hedge fund manager - believes that many governments in history have tried to reduce the burden of debt by printing more money, thereby weakening the value of the domestic currency. Increased inflation helps businesses and workers have higher nominal income over time, thereby expanding tax revenue and making debt repayment easier. However, this strategy carries risks because it erodes confidence in the currency and encourages investors to seek alternative assets such as gold.
Although the above factors seem to support the upward trend of gold in the long term, the US Federal Reserve (Fed) may become an important factor to reverse this momentum.
As the consumer price index (CPI) remains significantly higher than the Fed's 2% inflation target, Wall Street financiers are considering the possibility of interest rates continuing to rise. CME Group's FedWatch tool indicates that the market currently assesses a 72% chance that the Fed will raise interest rates at least once before the end of 2026.
Usually, when financial conditions are tightened, consumers, businesses and the government have to limit spending. This may weaken the drivers that helped gold prices soar to record highs at the beginning of the year.
Many investors are anticipating this scenario and this may be the reason why gold prices have fallen sharply compared to the recent peak.
Gold prices have increased by 64% in 2025, but investors should not expect similar increases to be repeated in the future. In the past 50 years, gold has brought an average yield of about 7.3% per year. A weak USD usually supports the prices of many types of investment assets, not just gold.
