Yellow Fever
Yellow Fever
Since the first gold bars were created in Mesopotamia thousands of years ago, they have been used as a store of value. The ancient metal that John Maynard Keynes once called a “barbarous relic” has been the best performing asset so far in 2025. This week’s investment comment looks at the potential reasons for gold’s blistering rally and analyses whether these are sustainable for investors.
Out of the (Bretton) Woods
Central banks today hold almost the same amount of gold (by weight) as they did at their peak in 1965, during the Bretton Woods era (see explanation below). However, this gold makes up a much smaller percentage of their total assets now compared to then. Before looking at the reasons as to why, it is worth looking at the history of bullion.
The Bretton Woods system was a monetary management system established in 1944 by 44 nations, including the US, Canada, and many Western European countries. Its purpose was to create a stable international economic order after World War II. This was a fixed exchange rate system where currencies were pegged to the US dollar within a narrow 1% band. The US dollar, in turn, was tied to gold at a fixed price of $35 per troy ounce. This helped the dollar become the world’s primary reserve currency.
This system effectively came to an end in 1971, when US President Richard Nixon unilaterally announced that the United States would no longer convert US dollars to gold at a fixed price. It was formally ended in 1973 when major currencies began to float freely against one another.
The reasons for the collapse of the Bretton Woods system were complex and developed over a number of years. The most important factor was the chronic and increasing US balance of payments deficits, largely due to spending on the Vietnam War and domestic programs. In addition, gold reserves were depleting as the number of US dollars grew, raising concerns that the US did not have enough gold to cover the $35 an ounce fixed rate. This lack of confidence led to international currency speculators betting against the US dollar, putting further pressure on the system, leading to its eventual collapse.
Gold is now the second-most important reserve asset for central banks
Source: Artorius, ECB
Many people at the time thought the end of Bretton Woods would mean gold was destined for irrelevance. Indeed, central banks started selling their holdings and continued doing so for decades. Fast forward to today and data released earlier in the year (chart above) shows that gold has surpassed the euro to become the world’s second-largest reserve asset among global central banks. For foreign central banks (non-US), gold holdings as a percentage of (foreign) reserves now exceeds those of US Treasuries for the first time in some thirty years.
In a modern era characterised by ever increasing geopolitical risk and uncertainty, gold is increasingly being viewed as the preferred asset to help diversify away from these risks.
Safe Haven?
Many point to the actions of the Trump administration to help explain the recent gold rally. Gold has been front and centre in a flight to safety that has reshaped global markets during Trump’s second term. Trump’s aggressive stance on tariffs and the market fallout that followed the president’s “liberation day”, which led investors to shift to gold, in part, reflect investor sentiment seeking protection from the volatility.
Crucially, Trump’s second term in office has seen policies which have undermined the properties underpinning dollar dominance. Attacking institutions such as the Federal Reserve (Fed) and the courts, threatening to add massively to debt and deficits through the “big, beautiful bill” and being an unreliable trading partner, have all undercut the dollar’s status. The efforts of the US President to influence the policymaking of the world’s most important central bank have helped exacerbate renewed fears of higher and persistent inflation.
For decades, central banks have held dollars as their ‘reserve asset’ – this can be seen as a ‘rainy day’ fund to see themselves through periods of economic turbulence. These assets are not intended to provide outsized returns, but to hold their value in a crisis and be readily available to sell. This has traditionally been the US Treasury market, which is the world’s largest and most liquid bond market. However, in recent years, we have seen central banks scale back their US dollar reserves, partially due to the sanctions that followed Russia’s invasion of Ukraine in 2022. When the US targeted Russia’s access to financial markets, many countries started asking themselves if their US dollar holdings might be vulnerable too. Since then, central bank net purchases of gold have exceeded 1,000 tonnes each year for the past three years, which are record levels. Unlike other financial assets, it is difficult for governments to place sanctions on gold, and it has no counterparty risk.
Central banks are ploughing record amounts into gold
Source: Artorius, Bloomberg
The slide in the US dollar this year, which, in turn, has made gold cheaper to buy in other currencies, can also help explain the rally. The first half of 2025 was the weakest for the dollar in half a century and that has also coincided with the strongest period for gold in almost as long.
All that glitters is not gold
After lacklustre jobs data from the US last Friday, markets are now fully pricing in at least a quarter-point interest rate cut by the Federal Reserve in their meeting next week, and some traders have started placing bets on a bumper half-percentage point cut. Lower interest rates typically tend to push the price of gold higher as investors, expecting a lower return from holding bonds, look to other assets. Fears of stagflation (high inflation and stagnant economic growth) are growing as the economic impact of Trump’s tariff policies start to be felt.
Gold has often been seen as a ‘comfort metal’ for investors in times of uncertainty and stress and it can easily be argued that we are living in times of stress. Despite historically having a low correlation to stocks and bonds, gold is still a volatile asset but may play a part in a diversified portfolio subject to an investors long term investment objectives.
Yuval Peshchanitsky
Portfolio Analyst
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Important Information
All expressions of opinion reflect the judgment of Artorius at 12th September 2025 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.
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