Can Gold Push Through USD 3,000 And Beyond?

the allure of gold: a journey through zurich to the heart of wealth

The number 13 tram in Zurich winds its way through the city’s bustling streets, eventually making its way uphill to the Uetliberg, a scenic destination that offers breathtaking views of the city and Lake Zurich. Among its passengers are often older locals, bank employees, and occasionally, wealthy individuals heading to the Credit Suisse (now UBS) building at Uetlihof. This building, with its unassuming entrance on the 8th floor, conceals a vast underground complex where gold bars are stored. It is here that some of the world’s most affluent investors come to gaze upon their gold reserves, a ritual that underscores the enduring allure of this precious metal.

For those who own gold, the past two years have been a time of celebration. Gold has delivered a remarkable 40% return, inching ever closer to the $3,000 mark. This performance is all the more impressive given the challenges posed by a stronger dollar and high-interest rates—factors that typically hinder gold’s ascent. Yet, despite these headwinds, gold has continued to shine, reinforcing its reputation as a resilient and sought-after asset.

gold: a polarizing asset class

Gold is an anomaly in the world of finance. For most investors, it is either entirely absent from their portfolios or occupies a significant portion, often exceeding 10%. This dichotomy is not surprising, given gold’s unique role in the financial ecosystem. Unlike other assets, gold does not generate income, nor does it have a intrinsic value tied to cash flows or earnings. Instead, its value lies in its scarcity, its historical significance as a store of wealth, and its ability to act as a hedge against uncertainty.

The love-hate relationship with gold is reminiscent of the British spread Marmite, which elicits either devotion or disdain. While some investors swear by gold’s ability to safeguard wealth during times of crisis, others dismiss it as a relic of the past, overly reliant on sentiment rather than fundamentals. Financial theory suggests that a portfolio should allocate about 2% to gold, but in practice, investors tend to take an all-or-nothing approach. This polarization highlights the emotional and psychological factors that drive gold’s appeal.

the rise of bitcoin: gold’s digital rival?

In recent years, the conversation around gold has been overshadowed by the rise of Bitcoin, which was touted as "digital gold." Bitcoin’s architects envisioned it as a decentralized, non-inflationary alternative to traditional fiat currencies, designed to mimic gold’s scarcity and immutability. However, Bitcoin’s behavior has differed from gold in one key way: while gold tends to move independently of other assets, Bitcoin has traded more like a speculative tech stock, exhibiting extreme volatility.

The shift in focus from gold to Bitcoin is evident in the evolving questions posed to graduates during job interviews. Once asked about the drivers of gold prices, interviewers now inquire about the factors influencing Bitcoin’s value. This shift reflects the broader financial landscape, where digital assets are increasingly competing with traditional safe havens like gold. Yet, despite Bitcoin’s meteoric rise, gold remains the go-to asset for those seeking stability in uncertain times.

understanding gold’s price drivers

The price of gold is influenced by three primary factors: its role as a monetary asset, physical demand, and its function as a store of value during crises. Historically, gold has served as a counterweight to paper money, with its price often moving inversely to the value of the dollar and medium-term interest rates. For instance, from the early 2000s onward, gold prices have tended to rise when inflation-adjusted yields on 10-year U.S. bonds have fallen—a relationship that has held true for much of the past two decades.

However, 2022 saw a departure from this historical pattern. Despite rising inflation-adjusted bond yields, gold prices continued to climb, defying expectations. This unexpected surge has led some analysts to declare that gold is "breaking out," a phrase often used to signal the start of a new bull market. While this could indicate Durability, it could also be a warning sign that a peak is approaching.

the paradox of gold’s strength

The recent strength of gold is all the more puzzling given the muted demand from key sectors. According to the Banque de France, the demand for gold is split into four categories: jewelry (49%), central banks (23%), financial investors (21%), and the electronics sector (7%). While Chinese and Indian households have increased their gold purchases in 2024, and central banks in emerging economies such as Russia and South Africa have also been buying up gold to diversify their reserves, financial investors have not been as active.

This raises the question: what is driving gold’s outperformance? If gold’s price were solely determined by interest rates, it would likely be trading closer to $2,000, given the persistence of high bond yields. Instead, gold’s ascent can be attributed to two additional factors: a short squeeze in the gold market and broader geopolitical tensions.

the short squeeze and geopolitics

The first factor behind gold’s recent surge is technical in nature. A short squeeze has been unfolding in the gold market, as bullion banks and speculators with short positions (bets that the price of gold would fall) are being forced to cover their losses by buying gold. This dynamic has been exacerbated by a spike in demand for physical gold, driven by fears of tariffs on gold and silver, particularly from Canada, home to many gold miners.

The second factor is more complex and harder to quantify: geopolitics. Gold has long served as a safe haven during times of uncertainty, and recent global events have only reinforced its appeal. The unraveling of the U.S.-China relationship, the unpredictable impact of tariffs, and the precarious state of government finances in major economies have all contributed to a sense of instability. In such an environment, gold is often seen as the ultimate insurance policy—a tangible asset that retains its value when paper money and financial systems are under strain.

For those living through these uncertain times, gold’s appeal is clear. It is a barometer of global anxiety, a reminder that in a world turned upside down, there is no substitute for the safety of physical gold.

the future of gold in a changing world

As the global security architecture continues to shift, gold’s role as a store of Value remains as relevant as ever. While Bitcoin and other cryptocurrencies have emerged as potential rivals, they lack the historical precedent and tangible nature that have solidified gold’s position as the ultimate safe haven.

Yet, gold’s future is not without risks. The possibility of U.S. tariffs on gold, for instance, could send shockwaves through the market, either driving prices higher or leading to a sharp correction. Similarly, geopolitical tensions could escalate further, pushing gold to new heights, or they could subside, causing investors to reassess their allocations.

Ultimately, gold’s trajectory will depend on the balance between its traditional role as a hedge against uncertainty and the emergence of new challenges and opportunities in the global economy. For now, one thing is certain: gold remains an indispensable asset in a world bracing for the unexpected.