THE ECONOMIST: What is driving gold’s relentless rally as the ancient asset attracts new investors

Bad is good news for the price of gold. These days good news is good news, too.

As President Donald Trump’s threats against America’s European allies intensified, the price of the yellow metal surged. When he abandoned those threats, it kept rising. It is already up by more than 17 per cent this year, rising to above $US5000 an ounce ($7143) for the first time ever on January 26.

It is not February yet and gold has already shot through many analysts’ forecasts for the end of 2026.

The asset is at the centre of the so-called debasement trade, whereby investors worried about fiscal splurges, fraught geopolitics and the collapse of institutional norms sell government bonds and dollars, turning instead to one of the oldest assets for protection.

Since Mr Trump’s wall of global tariffs was revealed to the world on April 2 last year, the S&P 500 index dropped by more than one per cent on 27 occasions. On average, the price of gold rose by 0.6 per cent per day during those sell-offs. But gold also climbs when stocks climb. On the 24 days when the S&P 500 leapt by more than 1 per cent, gold popped by 0.2 per cent.

In recent years central banks in emerging markets, led by China, fuelled the rally. Such hyper-conservative investors have fallen back in love with physical gold, which they hope will protect them amid geopolitical turmoil. Yet flows into gold exchange-traded funds suggest a new group of investors are catching the bug, lured by returns and diversification rather than safety.

Gold ETFs now hold more than 4000 tonnes globally. Their stash grew by 25 per cent in 2025 and is now worth over $US650 billion.

Asian investors are leading the way. In the past two years holdings of gold by Asia-based ETFs have more than tripled to 460 tonnes. In the last quarter of 2025 the Huaan Yifu Gold ETF, a Chinese fund, logged the second-largest inflows of any gold ETF, behind only the flagship fund of State Street, a giant American asset manager, whose holdings are 11 times larger. Big funds in Japan and South Korea likewise logged hefty increases.

Cheah Cheng Hye, the billionaire co-founder of Value Partners, one of Asia’s largest asset managers, recently said that he now invests 25 per cent of his wealth in gold, up from 15 per cent a year ago.

The door to more sustained institutional investment may be opening, too. India’s National Pension System, an umbrella group of defined-contribution pension schemes, permitted funds to allocate up to 1 per cent of their collective $US175b in assets to precious-metal ETFs. In early 2025 a pilot programme for the Chinese insurance industry allowed ten firms to invest the same share of their assets in gold.

Smart money turns up its nose at precious metals. An asset which produces no cashflows — and never will — is impossible to price by discounting the stream of expected future profits, as happens with stocks or bonds. Assets whose entire value is based on what someone else might pay for them in the future are a source of understandable concern for prudent portfolio managers.

But an asset that provides ballast during periods of panic, and which rises gently the rest of the time, is increasingly hard to turn down. Analysis by MSCI, a financial-data provider, suggests that an investor with a conventional mix of 60 per cent equities and 40 per cent bonds could have raised annual returns by four percentage points last year by switching half of those bonds into gold, while adding hardly any volatility to their portfolio.

Allocations to gold in the West’s immense institutional portfolios, which have typically ignored it, are still minuscule. According to Goldman Sachs, a bank, the metal accounts for just 0.17 per cent of Americans’ combined wealth held in stocks and bonds.

But each 0.01-percentage-point increase in that share raises the metal’s price by around 1.4 per cent. You do not need Americans to reach Asian levels of zeal for gold to keep climbing.