A week of extreme market volatility following US President Donald Trump’s “Liberation Day” tariff announcement earlier this month has highlighted the safe haven demand of gold.
In 1933, then-US President Herbert Hoover was quoted as saying “We have gold because we cannot trust governments”. That’s looking as true as ever today.
Earlier this month at the Mining Forum Europe, Alamos Gold (TSX/NYSE: AGI) CEO John McCluskey made the case for gold as a critical metal in the current economic turmoil.
“Ultimately, it is probably more of a critical metal than it's ever been and, and why it doesn't get recognised across the world as that is open to speculation,” he said.
“Gold is an important place to be right now. It will continue to be ever more important.”
Against the backdrop of confusion about tariffs and yo-yoing global markets, gold continued to shine, reaching a new record high of US$3245 an ounce.
The gold price is already up by around 23% so far this year.
Canaccord Genuity noted on Friday that traditional safe havens were faltering with the US dollar down 7% and longer-dated US treasury yields rising.
It said gold averaged a 2% gain during stock market corrections over the past 25 years versus an average decline in the S&P 500 index of 35%.
“The US dollar, a traditional safe haven, has increased by 7% on average during previous market corrections, and the Bloomberg US treasury index has risen 5% on average (8% if you exclude the 2022 market correction which occurred during high inflation and rising interest rates),” Canaccord said.
“Since February 19, gold is up 10%, the dollar down 7%, and the Bloomberg treasury index up 1% as of [Thursday’s] close, but treasury prices are dropping again [Friday] (i.e., yields are surging).
“The US dollar and treasury market have been foundational to the global economy since 1971 and, in our view, international confidence in the US dollar and US debt is quickly eroding as the United States pursues isolationism and as its balance sheet deteriorates.
“The share of foreign holdings of US debt has declined steadily since 2016 from a peak of circa 34% to circa 24% currently. And while declining, major foreign holders of US treasuries still hold US$8.6 trillion which we see as potentially an important lever in the trade battle with US debt climbing at a circa US$2 trillion rate. We note the US deficit has already totalled US$1.3 trillion, six months into FY25.”
Further gains likely
Last week, the World Gold Council reported that physical gold-backed exchange-traded funds attracted US$8.6 billion in March, helping to drive total March quarter flows of US$21 billion, or 226 tonnes, the second highest quarterly level in dollar terms on record.
The WGC said liquidity had arguably been bolstering both financial assets and the economy in the US for much of the post-COVID period, though in 2022, US financial conditions tightened forcefully as liquidity was removed from markets.
“This perfect storm caused a very rare annual joint decline in bonds and equities. Gold held up but also experienced some bumps along the way,” it said.
“We are now at a similar impasse in liquidity conditions, but with crucial differences that bode well fundamentally for gold.
“The one hurdle is the hitherto strong run-up in gold prices. Comparisons to the 2011 and 2020 peaks are likely to be made, but in our view, the environment remains supportive of further gains.”
Saxo Bank head of commodity strategy Ole Hansen said the combination of heightened global economic tensions, the risk of stagflation and a weaker dollar, was expected to continue to support gold.
“Adding to this is a market that is now aggressively positioning for the Fed to deliver more cuts this year—at current count more than 75 basis points of easing by year-end, and not least continued demand from central banks and high net worth individuals looking to reduce or hedge their exposure to US government bonds and the dollar,” he said.
“With all the mentioned developments in mind, we maintain our forecast for gold reaching a minimum of US$3300 this year.”
UBS has lifted its 2025 forecast to US$3500/oz from US$3000/oz, while Goldman Sachs upped its year-end target from US$3300/oz to US$3700/oz with one simple message: “Hedge recession risk with gold.”