Following discussions about markets ignoring Trump’s attack on the Federal Reserve, several readers criticized the omission of a major market. One asked, “Is it reasonable to exclude gold and silver from our definition of ‘the market’? Precious metals and mining stocks certainly did not ignore the recent Fed attack.”

We had already noted the sharp rise in gold prices, now surpassing $3,500 per ounce, but the reader was right that we did not give it enough attention. This reflects a common bias.

Professionally, I belong to the “discounted future cash flows” school, which tends to overlook “inactive” assets that yield no returns—like gold, art, Bitcoin, and others.

However, there is a strong argument to reconsider: while the largest cash-flow generating asset classes ignore the fragility of the US financial situation, economic slowdown, and Trump’s campaign against the Fed, gold shows remarkable alertness and clearly responds to these risks.

Several direct reasons explain gold’s recent rebound. First, simply, the dollar continues to decline (though it rose slightly), and gold is priced in dollars. As dollar weakness reflects concerns about the US’s financial and institutional strength, the transmission mechanism to gold is straightforward.

But it doesn’t stop there. “Dean Current,” a strategist at Macro Risk Advisors, points out that gold has a positive correlation with the VIX market volatility index, which makes sense if gold rises with increasing risk sentiment. Recently, the VIX, though still low, has started to rise.

Based on recent trends, gold holds a unique position to benefit from an environment where the dollar weakens and stock market volatility rises. However, this alone cannot explain gold’s jump from $2,000 to over $3,500 in just a year and a half. I recall being asked in 2023 or early 2024: if gold surpasses $2,200, won’t high prices undermine demand, especially from price-sensitive individual buyers in Asia? This proved partially true. But what this analysis missed was that these price-sensitive buyers no longer play a major role in setting gold prices. Lina Thomas from Goldman Sachs explains in a recent note that there are two buyer categories:

• The first is “conviction buyers”—such as ETFs, central banks, and speculators—who buy gold regardless of price.
• The second is “opportunistic buyers”—many households in emerging markets—who enter the market only when prices are favorable.

Conviction buyers allocate gold investments based on macro insights or risk-hedging strategies, and their buying flows determine price direction.

Conversely, opportunistic buyers buy on dips and retreat on rises, helping absorb price volatility but not driving price trends. Thus, “conviction buyers” set market directions.

The World Gold Council’s global gold demand report for Q2 shows the strong entry of this group—especially gold ETFs—into the market during the first half of this year.

Another reason to believe investors expect gold prices to remain high for a long time is the strong rush to buy gold mining stocks this year, after these stocks were absent from the first precious metal rally. Mining companies take a long time to increase gold production, so if you think price rises are short-term, buying mining stocks is not viable. Indeed, mining stock prices now reflect expectations of continued gold price increases for years. The key question remains: why did gold surge dramatically in recent weeks?

According to Akash Doshi from State Street Investment Management, this can be explained by the “yield curve inversion” phenomenon: short-term interest rates have started to decline, reducing the opportunity cost of holding gold instead of cash. Meanwhile, long-term rates remain high due to inflation fears, which also boost gold’s appeal.

More broadly, Doshi says gold is “a risk hedge and portfolio diversifier,” more sensitive to rising risks—especially those related to fiscal and monetary policy—than larger, more liquid assets like stocks and bonds. He adds, “Gold is sounding an alarm about US debt and the US dollar, signals not captured by other assets.”

Another major contributor to increased gold demand in recent years is central banks. Although the World Gold Council noted a slowdown in announced central bank purchases in the first half of this year, the long-term trend toward more buying is clear, highlighted by Lina Thomas’s estimates from Goldman Sachs based on UK customs data, as the UK hosts the world’s largest physical gold trading market.

It makes sense that Trump’s recent moves against the Fed would push other central banks to diversify reserves away from the US dollar and more toward gold. And who better understands the risks of a “captive central bank” than central bankers themselves?