TOKYO — Anyone who thinks gold’s surge into the stratosphere represents irrational exuberance isn’t paying attention to the wretched state of the Group of Seven (G7) economies.
US government debt is topping US$37 trillion, giving ratings agencies cause to reassess the world’s largest economy’s underlying health. France’s dueling political and debt crises have the International Monetary Fund gauging its available reserves.
Germany is skirting recession, with industrial output plunging 4.3% in August from July. Over in London, some commentators wonder how long the UK can avoid a 1970s-style date with the IMF, three years after the Liz Truss debacle.
Here in Japan, Sanae Takaichi, likely the next prime minister, is prepping markets for a fresh tsunami of fiscal and monetary stimulus, causing the yen to tumble past 153 to the dollar and investors to re-engage “yen-carry trades,” whereby they borrow cheaply in yen to bet on riskier assets elsewhere.
Against this backdrop, Goldman Sachs’ prediction that gold is headed for $5,000 per ounce — from just around US$4,000 now — seems less about froth than valid concerns that one fiat currency has more fleas than the next.
Many argue that the Chinese yuan is on its way to saving the day. Yet the lack of full yuan convertibility and the People’s Bank of China’s independence limit the yuan’s utility as a viable or attractive safe haven.
This moment, though, seems to be generating a perfect storm driving demand for gold. One that could just be beginning, if former Asia Times columnist David Goldman was right in an October 2024 article headline asking, “$10,000 Gold?”
Typically, investors dump the dollar and other fiat currencies to hedge against inflation, currency risk or geopolitical instability. Today, all three considerations are causing capital to flock to gold in ways that should worry governments everywhere.
Take the dollar. Data from the Federal Reserve Bank of New York shows that the amount of US government debt the institution holds for other top central banks is at an over-a-decade low. In July, so-called “custody holdings” were just $2.8 trillion, the lowest level since August 2012.
The data is confirming fears that US President Donald Trump’s tariffs would ultimately devastate US Treasuries. Since May, US Treasury Secretary Scott Bessent’s team had had more and more trouble attracting ample demand at new US government debt auctions.
The turmoil zoomed across the Pacific in record time. In May and June, Tokyo held some of the worst bond auctions since 2012 and 1987, depending on the metrics. In August, 20-year yields surged to their highest levels since 1999.
One of the biggest global worries — and boons for gold demand — is Trump’s assault on US Federal Reserve independence. As Trump threatens to fire Chair Jerome Powell and angles to remove Governor Lisa Cook, trust in the dollar is falling faster than gold is rising.
Efforts by the Treasury Department under Trump 1.0 and Joe Biden before him to weaponize the dollar for diplomatic gain have done their own damage to trust in the buck.
The worry is that if the Fed loses its autonomy and comes under extreme Trumpian pressure to significantly cut interest rates to juice an economy stalled by his tariffs, runaway inflation is nearly assured.
Gold “may be a better safe-haven than Treasuries,” says Bart Melek, head of commodity strategy at TD Securities. “Add to that the fact that ore grades are dropping, the increased use of these factors of production suggests that gold would be better at protecting purchasing power.”
Goldman Sachs argues that if just 1% of privately held US Treasury holdings pivoted into gold, the yellow metal could surge toward the earlier-mentioned $5,000 level. HSBC analyst James Steel points to today’s gamut of geopolitical uncertainty and concerns about the Fed and US finances will keep gold in the news.
“We anticipate that prices may continue to spike higher near term and into the first half of 2026,” Steel says, “but expect some price moderation in the second half.”
Strategist Weiheng Chen at JP Morgan Private Bank notes that the trajectory of global markets points to gold “making new highs” ahead.
“While Fed Chair Powell’s commentary did not offer a clear timeline of rate cuts going forward, we continue to expect the Fed to deliver rate cuts ahead should we see further weakness in US economic conditions, and gold typically performs better in a lower interest rate environment, given that lower yields decrease the opportunity cost of holding a non-interest-bearing metal.“
Adam Turnquist, strategist at LPL Financial, adds that the “latest leg higher has been underpinned by the growing uncertainty over the US government shutdown and fear-of-missing-out flows into physical gold exchange-traded funds.”
But it’s also a sign of something much darker. Since gold doesn’t produce income, it’s a purely defensive asset. When it floods onto portfolios, it means investors are bracing for turbulence. This is why John Maynard Keynes famously dismissed gold as a “barbarous relic.”
In the US, Ray Dalio, founder of Bridgewater Associates, worries of “signs of deterioration” and a “movement toward an impending debt crisis.” He notes that “such a crisis occurs when the constriction of debt-financed spending happens, like a debt-induced economic heart attack.”
At the very least, the surge in gold suggests cardiological twitches in the global financial system.
In order to prevent a crisis, Dalio advises the US to lower its budget deficit to 3% of gross domestic product. Yet given the political polarization of the moment — including the US government being closed — there’s little hope of Washington getting its fiscal house in order anytime soon.
Fears that a speculative bubble in artificial intelligence investment will soon burst, challenging the Fed’s ability to stabilize markets, are also rising.
“Fired up by optimism about the productivity-enhancing potential of AI, global equity prices are surging,” says Kristalina Georgieva, managing director of the International Monetary Fund.
“Today’s valuations are heading toward levels we saw during the bullishness about the internet 25 years ago,” she said, referring to the dot-com crash.
Georgieva notes that “if a sharp correction were to occur, tighter financial conditions could drag down world growth.”
While “AI is real,” says JPMorgan Chase CEO Jamie Dimon, portions of money being invested now will “probably” be wasted.
“I am far more worried about that than others,” Dimon told the BBC. “I would give it a higher probability than I think is probably priced in the market and by others.” Dimon adds that “the level of uncertainty should be higher in most people’s minds than what I would call normal.”
It seems ominous, too, that the People’s Bank of China has increased its gold reserves significantly for 11 consecutive months as of September. That month, the PBOC’s gold holding reached 74.06 million ounces.
The PBOC said the country’s gold reserves were valued at $283.29 billion at the end of last month, up from $253.84 billion at the end of August.
Continued purchases “would reinforce the idea that China is keen to de-dollarize and accelerate its actions in that space,” independent precious metals analyst Ross Norman told Reuters.
Wael Makarem, strategist at Exness, adds that markets are “speculating that China’s bid to host foreign gold reserves signals a long-term push to elevate its role in the global monetary system. Investors could be interpreting this as incremental de-dollarization momentum, which could support gold.”
These ramped-up purchases come despite gold having skyrocketed more than 50% in the last 12 months. It’s no coincidence that this year’s rally — and central bank hoarding — heated up since the Trump 2.0 era officially began in January.
His second administration has China rethinking its general reliance on the US dollar. Trump, after all, returned to office with even bigger plans to curb the Fed’s independence and hasten the surge in US government debt toward the $40 trillion mark. Trump’s tariffs are also undermining trust in the dollar.
Lawson Winder, an analyst at Bank of America, says central banks are buying gold “to diversify reserves, reduce reliance on the dollar, and hedge against inflation and economic uncertainty. It’s a “trend that we think is set to continue, especially amid uncertainty surrounding US tariffs and fiscal deficit concerns.”
Daniel Von Ahlen, TS Lombard strategist, says “Trump’s attacks on the Fed” and “explicit desire for a weaker dollar only add to that view. The dollar remains overvalued on most foreign exchange metrics. With US dollar negatives ubiquitous, why not expect the dollar to become undervalued? We remain firmly short dollars across a range of trades in our book.”
Central bank gold purchases have been especially frenetic among governments that aren’t particularly friendly to US interests, namely China, Egypt, Hungary, India, Kazakhstan, Kyrgyzstan, Turkey, Uzbekistan and Gulf States like Qatar and others.
BRICS nations — Brazil, Russia, India, China, South Africa – have been particularly overt about their desire to de-dollarize. The bloc’s push to create a dollar alternative may now kick into overdrive as the Trump administration turns up the temperature on Brazil in uniquely personal terms.
Trump tied his 50% tax on what he calls Brazil’s “attacks” on US tech companies and pursuing a “witch hunt” against former President Jair Bolsonaro. The Trump ally was recently found guilty over his alleged role in efforts to overturn the 2022 election.
BRICS members may view this broadside in the context of US efforts to weaponize its financial dominance. Trump’s threats to penalize countries that flirt with using other currencies haven’t gone down well on FX markets.
Yet the dollar remains dominant for several reasons, says Rodrigo Catril, a strategist at National Australia Bank. That’s because it’s the most liquid currency, trades freely and remains a pivotal lending medium around the globe.
But, he adds, as “Trump increases the pressure on BRICS, it may well accelerate a move away from the dollar.”
The rally in gold is a clear sign that the world is starved for new safe havens as 2025 staggers to a close — and that $5,000-per-ounce projections may be anything but fool’s gold.
Follow William Pesek on X at @WilliamPesek
