Gold's 40% surge this year has rewarded investors handsomely, but the record highs could also be interpreted as a warning. Firstly, against the waning of fiscal and monetary discipline and secondly; against the quiet embrace of chronic inflation as policy.
Politicians have discovered that austerity loses elections, while voters tolerate some inflation as long as the economy keeps growing. Therefore, it’s probably not too far-fetched to assume that most US political leaders have effectively adopted some variation of Modern Monetary Theory (MMT): i.e. a government that has a monopoly on issuing its own sovereign currency is not financially constrained by budget or taxes to fund growth. As a result, some degree of inflation and budget deficits are acceptable, if growth exceeds the rate of inflation during their time in government. This can create a structural bias toward inflationary policies regardless of party or stated ideology.
When politically driven inflation becomes embedded in expectations and policy frameworks, gold, as a finite real asset, becomes increasingly valuable as a store of value. Currencies face persistent debasement through deliberate policy choices.
Could this political shift hint at something more fundamental – the gradual weakening of the post-1971 fiat currency system that has relied on central bank credibility rather than gold backing for monetary stability?
Soaring gold price
Gold has been one of the strongest asset classes year-to-date, defying conventional expectations. Current prices near $3,600/ounce (oz) have even exceeded the previous 1980 peak, when it hit around $3,500/oz in today's money.
Figure 1. Last week, the price of gold surged past its previous 1980 peak
Source: Bloomberg and Federal Reserve Bank of St Louis, as of 12 September 2025.
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Traditionally, there have been a number of environments where gold may outperform:
- Safe-haven status – during periods of market stress or economic and geopolitical shocks, investors often seek the comfort of gold
- Lower rate environment – physical gold being a non-yielding asset, the metal tends to perform well during rate cut cycles (which sometimes coincide with periods of shocks and stress)
- Periods of monetary and fiscal expansion – such as the ballooning US balance sheet in response to the Great Financial Crisis (GFC)
- Currency rotation – this can be an effect of distrust in fiat currencies post-GFC monetary expansion or the de-dollarisation trend we are currently seeing
- Inflationary or stagflationary periods – often occurring in conjunction with certain scenarios above
Gold's current performance broadly reflects these traditional drivers, but today's environment presents unique complexities.
Financial markets have rallied to new highs while recession fears have faded, seemingly undermining the safe-haven case. However, this is offset by escalating geopolitical fragmentation. The arena of war has greatly expanded – future conflicts are fought not only on battlefields, but also on trade tables and through tech competition. All these forms of warfare have escalated meaningfully in recent years, providing gold with safe-haven tailwinds.
Multi-polar world boosts gold
This geopolitical fragmentation reinforces the domestic policy bias toward loose fiscal and monetary policy. Governments facing external pressures rarely choose internal austerity. The recent stimulus announcements from China and Germany are a case in point.
The initial fear of an austerity push by the new Trump administration has also dissipated. The gameplan from the US administration seems to be pushing for lower rates, promoting growth and running the economy hot.
From a government perspective, this offers two short-term benefits: temporarily inflating away the government debt burden while generating higher GDP and revenue. However, the longer-term consequence is chronic inflation and increasingly loose fiscal and monetary policy.
That’s a further boon for gold, as lower yields make holding the metal relatively more attractive. While the pace and magnitude of cuts may be subject to debate, markets have fully baked in a US rate-cutting cycle, starting with this week’s Federal Reserve meeting even though the inflation rate is still quite a bit away from the Fed’s 2% target. Last week’s consumer price print for August showed the headline annual rate accelerate to 2.9%, from 2.7%.
Doves rule
In the tug of war between doves and hawks, doves appear to have the upper hand, with the direction of rates pretty clear for the coming years. Investor concerns have shifted from "will there be rate cuts" to "will the next Fed chair be a dove or super-dove."
There are multiple longer-term ramifications, but they spell a case for chronic inflation; we expect more gradual than sharp supply chain-induced spikes. And such an environment will likely engender further currency distrust and continue the secular de-dollarisation trend.
Looking ahead
Could the combination of chronic inflation acceptance, accelerating de-dollarisation, and record gold prices signal the early stages of a new monetary regime? Maybe not a return to Bretton Woods, but a move toward something different where gold reclaims its role as the ultimate store of value.
Given precious metals' strong performance over recent years, investors need to expect some volatility ahead. But the underlying trends show no serious signs of abatement, and history has repeatedly demonstrated that in such environments, precious metals and real assets play an important role in diversified portfolios.
All data sourced from Bloomberg unless otherwise stated.
Author: Albert Chu, a portfolio manager at Man Group who specialises in natural resources at Man Group.
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