Rising Demand for Gold and the Reasons Behind Its Soaring Prices

Gold prices in global markets are witnessing a sharp rise that is unprecedented in both its pace and its volatility, prompting questions about the reasons behind this surge, especially since gold generates only modest returns, while demand for it has grown over the past two years, causing its prices to climb steeply. The rise continues through the current year, 2025, with leaps to record levels, defying the traditional inverse relationship with interest rates, particularly in the first half of the year.

While gold's traditional role as a store of value remains strong, the current surge in gold prices highlights the complexity of global economic dynamics and raises the question of whether the recent rally in gold prices will continue or not. This sharp rise cannot be explained by a single economic factor; rather, it is the result of a complex interplay of global geopolitical and financial developments that have re-established the yellow metal's standing as one of the most important safe assets. The most prominent of these factors are:

The weakness of the US dollar is one of the main factors behind the recent rise in gold prices, especially since gold is typically priced in US dollars and its value is inversely linked to that of the dollar: if the dollar falls, the price of gold rises, and vice versa. Consequently, when the ability of the dollar and cash assets to protect purchasing power declines, gold becomes a more stable option for preserving wealth.

The shift toward yellow gold has also been reinforced by the dispute between US President Donald Trump and the Federal Reserve over monetary policy, which has cast doubt on the independence of the US central bank, while US public debt has surpassed the $37 trillion mark, raising further doubts about the ability to service and repay it.

Geopolitical risks and widening global conflicts, particularly the conflicts in the Middle East, the ongoing war in Ukraine, escalating tensions in US-China relations, and even the buildup of the US military presence in the Caribbean region to confront Venezuela, have played a decisive role in creating a climate of uncertainty and have prompted investors and states alike to turn to gold as the most reliable safe haven, driving the recent rise in gold prices regardless of interest rate movements or the strength or weakness of the dollar.

The trade war waged by US President Donald Trump and his tariff hikes have also contributed to higher gold prices. Gold prices rose last April when Trump unveiled his "Liberation Day" tariffs on most countries around the world, ushering in a period of acute uncertainty over the future of global trade.

4- Reassessing the role of gold in the international financial system

Rising demand for gold from central banks and investment funds, along with their drive to diversify their reserves, falls within the global financial system's gradual shift toward broader monetary multipolarity as the absolute dominance of the dollar recedes. In

this context, countries and major financial institutions are reviewing the role of gold as a long-term strategic asset, increasing demand for it and supporting higher prices.

What is known as "selling fiat currencies", whether the dollar or the euro, and the lack of confidence in them due to the debt burdens and economic challenges within their respective economies, come as part of this reassessment of gold's role and the view that turning to gold is the alternative to fiat currencies.

Turning to gold is no longer limited to individual investors; since 2022, it has become an increasingly common choice for investment funds and foreign governments that earn large sums of US dollars from foreign trade at a time when their confidence in the US currency and government bonds is waning, providing a major driver for gold prices.

Recent data show that central bank purchases exceeded 900 metric tons in the first 9 months of the current year, particularly in Russia, China, India and Turkey, and even among some banks in the European Union. These countries have substantially increased their gold reserves, reflecting their concerns over the stability of the US dollar as part of a strategy to diversify their reserves and reduce their reliance on the dollar, in addition to hedging against financial sanctions and geopolitical risks.

Indicators point to weak global growth, whether in Europe, China or the United States, amid expectations that it may slow further and slip into an inflationary

recession. This slowdown translates into a decline in risk appetite and pushes investors toward assets with intrinsic value, foremost among them gold.

Gold and interest rates are inversely related: the higher interest rates rise, the less attractive gold becomes. High interest rates yield rewarding returns on cash savings when deposited or lent out at interest. Conversely, if interest rates fall, returns on savings decline, making gold more attractive to hold. The same applies to other interest-bearing assets, such as bonds.

Despite countries' efforts to bring inflation under control, inflation rates in many advanced economies remain above target levels. This steady erosion of purchasing power boosts demand for gold as an effective hedge against inflation and rising commodity prices, particularly since gold, as a precious metal, is known for its ability to preserve its value over time, making it an attractive option in times of inflation.

The record surge in gold prices reflects a profound shift in the structure of the global economy and in the nature of the risks confronting it. The yellow metal is no longer merely a temporary safe haven, but has become a strategic pillar for states and investors alike. Amid persistent global tensions and shifting monetary policies, gold is likely to maintain its strong standing in the markets unless the world witnesses a broad detente that restores confidence to the international financial system.

In light of these realities, small investors would be well advised to diversify their portfolios between gold and silver to hedge against the risk of profit-taking pullbacks, and to hold on to both given the global economic and geopolitical environment and the inflation afflicting the world. In the meantime, these investors should keep a close watch on monetary policies that affect gold and demand for it in order to gauge future trends.

Translated from Arabic with AI. Read it in Arabic