Gold prices hit a new record this week, climbing past $2,900 per ounce for the first time. The surge comes as trade tensions escalate, with President Donald Trump suggesting a possible 25% tariff on all steel and aluminum imports into the U.S.
Despite gold’s strong performance, some analysts doubt the rally will hold. Joe Maher, an assistant economist at Capital Economics, notes that gold has been a top-performing asset this year, even without the usual tailwinds like a weaker U.S. dollar or falling real yields. Interestingly, the traditional inverse relationship between gold and the 10-year U.S. Treasury Inflation-Protected Securities (TIPS) yield has weakened in recent weeks.
Maher believes investor anxiety over a potential trade war is a key factor behind gold’s climb. He also suggests that fears of tariffs on gold imports may have prompted U.S. investors to stock up, leading to a rise in gold holdings at the Comex exchange.
However, trade concerns aren’t the only reason for gold’s rise. Central banks have been buying heavily, possibly as a hedge against U.S. sanctions. This trend gained momentum after the U.S. and its allies froze roughly $300 billion in Russian reserves following the Ukraine invasion.
The growing U.S. fiscal deficit is another concern. Trump’s recent comments on national debt may have made reserve managers uneasy, pushing them toward alternative assets like gold.
China’s strong demand has also played a role. The Chinese central bank has been increasing its gold reserves, and private investors in China are turning to gold as a safe bet.
Capital Economics acknowledges that these factors could keep gold elevated in the short term. However, the firm expects central bank diversification to be a slow process. Higher prices might also deter some investors, and if U.S. Treasury yields rise later this year, gold could drop. The firm predicts gold will fall to $2,750 per ounce by the end of 2025.
