The Allure of Gold as a Safe Haven Drives its Price from Peak to Peak

SadaNews - Throughout the centuries, gold has been a safe haven when political and economic stability wavers. Its status as a highly valuable and reliable commodity, easy to transport and sell anywhere, provides a sense of security amid turmoil.

Investors flocked to gold in 2025, particularly gold-backed exchange-traded funds, driven by the trade war initiated by President Donald Trump, his threats to the independence of the Federal Reserve, geopolitical tensions, and concerns regarding U.S. government debt inflation. Additionally, central banks continued to increase their gold reserves.

This precious metal registered a series of record prices, surpassing its inflation-adjusted peak recorded in 1980. October witnessed a noticeable decline in prices amidst fears that the rise had reached excessive levels. However, gold quickly regained momentum, buoyed by expectations of further U.S. interest rate cuts, and its price rose, exceeding $4,400 per ounce near the end of the year, a level it had never reached before.

Why is gold considered a safe haven?

For contemporary investors, this primarily relates to gold’s stability and liquidity, rather than any intrinsic yield.

Gold is seen as a hedge against inflation, especially when the purchasing power of currencies erodes. The spotlight has been on rising prices and the labor market in the United States, amid growing pressures from Trump on the Federal Reserve to respond to his will and cut interest rates.

Gold, which does not yield interest, typically becomes more attractive in a low-interest-rate environment, where the opportunity cost of holding it decreases compared to interest-yielding assets. Investors are betting that the Federal Reserve will cut rates further in 2026, and that the incoming chairman of the central bank - to be appointed by Trump - will adopt a more accommodative monetary policy than Jerome Powell.

Gold and silver near record levels as bets on rate cuts increase

Investors are wagering that the Federal Reserve will further reduce interest rates in 2026, and that the new central bank chief - scheduled to be appointed by Trump - will pursue a more accommodative monetary policy than Jerome Powell.

Investors have also turned to gold, silver, and other precious metals as part of what is known as currency debasement trading. The mounting deficits in global balances have shaken their confidence in traditional safe havens from market volatility, particularly sovereign debt and currencies.

The price of gold has historically been inversely related to the U.S. dollar, as it is priced in dollars; therefore, when the dollar weakens, gold becomes cheaper for holders of other currencies.

Are investors alone fueling the rise in gold prices?

Away from market movements, gold ownership is deeply rooted in both Indian and Chinese cultures, which are two of the largest markets for this metal in the world, where jewelry, bullion, and other forms of gold are passed down through generations as symbols of prosperity and security. Indian households own about 25,000 tons of gold, which is more than five times the amount stored in the U.S. Fort Knox.

Actual buyers are known for their acute sensitivity to prices. When gold's allure for financial market investors diminishes, jewelry and bullion buyers often step in to seize buying opportunities at attractive prices, contributing to price support.

Why have central banks increased their gold purchases?

The significant rise in metal prices since the beginning of 2024 is partly due to massive purchases made by central banks, particularly in emerging markets, in a bid to reduce their dependence on the dollar, the world's primary reserve currency.

Central banks have been net buyers of gold for over a decade, but they have intensified their purchases in the wake of Russia's invasion of Ukraine. With the U.S. and its allies freezing the assets of Russian central banks in their countries, the vulnerability of foreign assets to sanctions became evident.

The People's Bank of China continues its buying spree, having increased its gold reserves for the thirteenth consecutive month in November. Bloomberg reported that the People's Bank of China is seeking to take over the management of foreign sovereign gold reserves, as part of an effort to bolster its position in the global gold market. Most countries that hold gold abroad store it with the Bank of England.