Bulls and bears battle over gold

Gold is shining brighter than ever. After delivering a 27% gain in 2024, it has carried its momentum into the new year, climbing higher each week and setting new records. This powerful rally leaves investors wondering how much upside remains for bullion.

In the past, the inverse correlation between real interest rates and the price of gold gave some direction. This makes sense, as lower interest rates reduce the opportunity cost of holding gold, a non-yielding asset. At the same time, higher inflation makes gold more attractive as a hard asset, serving as a hedge against the eroding value of fiat currencies. However, recent market trends show that this long-standing correlation between gold and real interest rates has broken down. Despite rising real rates, gold has continued to climb. This indicates that other factors are at play. In this article, we explore both the forces supporting the rally and the potential risks that could dampen its momentum.

The historically-inverse correlation between real rates and gold has broken down

Source: DPAM, 2025

The bull charges ahead

One of the most prominent drivers behind last year’s gold rally was the surge in central bank purchases, particularly in Asia. The freezing of Russia’s foreign exchange reserves in 2022 sent a warning signal to the whole world that Washington can arbitrarily confiscate any country’s dollar-denominated assets. In response, central banks such as the People’s Bank of China (PBoC) accelerated their shift away from the greenback, replacing US Treasury holdings with gold—a neutral, non-sovereign, hard asset that offers greater security. We believe that this trend will continue.

A few weeks ago, the new US Secretary of State, Marco Rubio, stated that it is abnormal for the world to be dominated by a single superpower and that we are transitioning back to a multipolar system. Looking at past multipolar eras, such as those during World War I and World War II, gold’s share of global international reserves was around 80%, which is much higher than today’s 20%.

Investors are also becoming increasingly aware of the budgetary challenges that many countries face. With worsening demographics and low productivity growth, the long-term sustainability of the debt position is becoming a real concern. If governments fail to address this, it could lead to monetary debasement, with real rates are kept low to devalue the currency—and, by extension, the debt burden. In such a scenario, US Treasuries could lose their status as the world’s premier reserve asset, to the benefit of gold, which keeps its real value. The more prominent role of gold in the financial system is also reflected in the new Basel regulations, which now classify physical gold as a Tier 1 asset, treating it as an equivalent to cash.

Finally, gold is also being supported by what is called the “Trump Trade”. The policies and rhetoric associated with Trump—such as reduced trust in international institutions and a shift toward economic nationalism—have contributed to heightened geopolitical and economic uncertainty. This environment obviously bodes well for gold, a traditional safe-haven asset. But gold could also be affected more directly. Trump’s efforts to weaken the US dollar could result in a higher demand for physical gold, making it more affordable for buyers using other currencies. Investors also worry that Trump may impose new tariffs on raw material imports, including gold. This has already triggered a surge in gold shipments from London—the world’s largest physical trading hub—to New York, the centre of the futures market. As liquidity in London tightens, short-term borrowing costs have risen sharply, potentially setting the stage for a short squeeze by keeping short sellers at bay.

Will the bear strike back?

Although Trump's approach is often viewed as a source of geopolitical instability, he is actively working to broker peace in both Ukraine and the Middle East. If successful, this could lead investors to take profits on gold, especially if a deal with Russia includes the unfreezing of previously sanctioned assets.

Real interest rates also still matter, despite their weakened correlation with gold prices. Expectations of higher interest rates for longer would be a drag on the performance of gold, given that it does not yield any interest. Alternatively, if the new US administration manages to get their finances under control, by, for example, reducing government spending—it could make US Treasuries more attractive again as a reserve asset.

Capital could also flow back into equities. In China, for example, not only the central bank but also households have been hoarding gold. This happened on the back of real estate turmoil and weak stock market returns. However, since the start of the year, Chinese equities have entered a bull market, driven by inflows into the technology sector following the launch of DeepSeek. If this rally continues, we may see households shifting some funds from gold to the stock market.

Who claims the gold?

Gold continues to shine, building on its strong performance in 2024. While short-term risks exist, the medium- to long-term outlook remains bullish. Central banks still have significant capacity to increase their gold holdings, geopolitical uncertainty is here to stay in a multipolar world, and there are no signs of meaningful improvement in the global debt landscape. We remain structurally positive on gold.