• Gold prices have surged recently, reaching a high of $3,429 an ounce in April¹
• According to the World Gold Council, c.20% of global demand is now driven by Central Banks
• China currently holds 6% of their reserve in gold²

Many reasons have been put forward to explain gold’s recent price surge and with so much written about the precious metal in recent months, this week we will explore what may be behind such interest. Traditionally though, the gold price is closely linked to economic certainty, US dollar strength and interest rates. When each of these factors are low, gold is more appealing since it is non-yielding and can remain a reliable store of intrinsic value given its durability and absence of counterparty risk.

Gold price ($) over five years

Central Bank activity

The sanctioning of Russia’s central bank assets by Western states in reaction to the war in Ukraine arguably could have alerted others, notably China, to the risk of holding dollar assets in reserves. This idea is supported by a fall in FX reserves of the US dollar globally and a reduction of China’s US treasury (government debt) reserves, seemingly replaced with gold. Since 2022, China’s share of gold reserves has almost doubled to 6%². With a 145% tariff currently in place on imported Chinese goods to the US (though new rhetoric around reaching a trade deal has been reported), we can’t imagine China will be seeking to purchase dollar assets at present, at least publicly

Change in Central Bank gold holdings since January 2022

Source: Capital Economics, 2025

Heightened fiscal, inflationary, and geopolitical risks

As we’ve written in previous notes, President Trump’s aggressive use of tariffs and pullback from longstanding allied relationships has created heightened uncertainty around future economic growth, inflation and fiscal spending. While this uncertainty has been received generally negatively by equity markets, gold’s perceived safe haven asset quality which stems from its finite source, independence from a third-party obligation and cultural importance has given support to investors. Indeed, there have been eight US large cap bear markets in the past fifty years, and gold has justified its reputation within each of them². Though new heights of gold have recently been reached, we expect its price to remain elevated should such rhetoric prevail.

US treasury yield

The gold price has a long-standing inverse relationship with treasury yields due to its non-income paying feature. Typically, when yields are high, the gold price retreats since holding the asset becomes less attractive (you’re not afforded any liquidity while holding, all return is via capital growth at the point of sale), but that dynamic has recently been challenged with gold prices rising while yields did too. Perhaps this is due to inflation risk being heightened in the US and the possibility of higher interest rates, or at least them falling not as quickly as the market had previously priced is considered alongside geopolitical uncertainty.

Bowmore portfolios

Gold is not currently featured within Bowmore portfolios. While we have previously allocated toward a commodity index to gain broad exposure, which was particularly useful in 2022’s double digit inflation, but we are currently preferring to allocate to high yielding fixed income assets, as we are conscious that the market is currently pricing in four interest rate cuts in the US this year and with employment figures remaining resilient, we believe there is downside risk to this assumption.

We recently increased exposure to the Aegon high yield bond fund within core portfolios, which focuses on generating income through investments in corporate bonds with a B average rating. The fund yields 7.89% and has also proved resilient to the broader equity market contraction year to date, returning 1.6% in capital growth.

Source: LSEG DataStream, data as at 01/05/2025

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.

Sources:

¹ Trading Economics, 2025

²  Capital Economics, 2025