Interviewer: Hasti Rabiei
Interviewee: Hamzeh Arabzadeh

Hasti: Over the past year, investors have shown a strong appetite for buying gold. This increased demand has, in turn, been reflected in gold prices. Over the past year, gold prices have surged by 38%, pushing the price of an ounce of gold above $2,700—a record high in global markets. Hamzeh, what’s going on? Why have we seen such a sharp increase in gold prices?

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Hamzeh: Investing in gold is generally a way to preserve wealth. It is considered a low-risk investment, and because of this low risk, it does not generate high returns. Essentially, it is a conservative, low-risk investment that typically gains popularity when uncertainties rise, inflation expectations increase, or when macroeconomic conditions and stock markets deteriorate.

Looking at historical trends, we can see this pattern. Until 1971, due to the Bretton Woods system, gold prices were fixed. After that, we observed three distinct periods of sharp price increases. The first was during the oil shock of the late 1970s, when the global economy fell into stagflation, and the price of gold surged from $65 per ounce in 1973 to $850 per ounce in 1980. The second came during the 2007–08 financial crisis, when gold prices, which had been gradually rising in the early 21st century, jumped dramatically from $650 per ounce in 2007 to $1,200 per ounce in 2009—almost doubling in just two to three years. The third shock occurred during the COVID-19 pandemic when, in August 2020, the price of gold hit $2,000 per ounce.

Now, in 2024, we are witnessing another major gold price surge. At the beginning of the year, gold was priced at around $2,000 per ounce, and now it has surpassed $2,700.

Gold investors are typically risk-averse individuals who are not seeking high returns but rather want to protect their wealth against inflationary shocks. However, many of the arguments made by gold investment advocates have not been particularly convincing. For example, some claim that the U.S. government might default on its debt. If that were to happen, the entire global economy—and particularly the U.S. dollar—would be severely impacted, making it an unlikely scenario to justify gold investment.

Another argument mentioned in The Economist is that China and Russia may introduce gold-backed currencies, which could significantly boost global gold prices. However, this also seems unlikely.

Nevertheless, the increasing geopolitical tensions in recent years—especially between China and Western countries, the Russia-Ukraine war, and conflicts in the Middle East—have raised alarms, pushing investors to believe the global economy may be heading in the wrong direction, prompting them to invest in gold.

Most of the recent increase in gold demand has come from two sources: retail investors and central banks. Interestingly, large investment institutions have not yet moved towards large-scale gold investments.

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Hasti: That’s an interesting point. Why haven’t major investment institutions turned to gold?

Hamzeh: As I mentioned earlier, gold is a safe, low-risk, and generally low-return investment. Because of this, it is not very attractive to professional investment institutions. The Economist reports that among large U.S. investment firms with over $100 million in assets, only about 25% hold gold-related ETFs in their portfolios. Even among these firms, gold makes up only 1.5% of their total assets on average. This suggests that major investment firms are not the primary drivers of the rising demand for gold.

On the other hand, family investment offices, which manage the wealth of high-net-worth families, have shown a greater preference for gold investments. Their goal is to preserve family wealth, leading them to maintain low-risk portfolios. These family offices have grown significantly in recent years. According to The Economist, assets under management by these offices have increased from $3.3 trillion in 2019 to $5.5 trillion today. Given their strong interest in gold, this growth has contributed to increased gold demand.

A significant portion of this demand also comes from China and India. Together, these two countries account for one-fifth of the global economy, yet they purchase more than half of the world’s physical gold (excluding central bank purchases). In China, the real estate crisis has pushed investors toward gold, with gold bullion and coin purchases increasing by 44% in the 12 months leading up to June this year. In India, rising economic prosperity has allowed more people to afford gold. Interestingly, per capita gold purchases in India are comparable to those in Germany and the United States, despite the vast income differences. Cultural factors likely play a role in this strong gold demand.

As the economic influence of countries with a strong preference for gold grows, global gold demand rises accordingly.

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Hasti: You also mentioned earlier that central banks have played a major role in increasing gold demand. What exactly has been their role in driving up gold prices?

Hamzeh: While private investors have contributed to the rising demand for gold, the primary driver behind the surge in physical gold demand—and consequently the rise in gold prices—has been central banks.

For decades, the share of gold in central bank reserves had been declining. In 1970, gold accounted for 40% of global central bank reserves. By 2008, this figure had dropped to just 6%. However, in recent years, it has been increasing again, reaching 11% last year—the highest level in two decades.

Hasti: What’s behind this shift? Why have central banks been increasing their gold reserves?

Hamzeh: One key reason relates to Russia’s war and the Western sanctions that followed. When Western countries froze Russia’s foreign exchange reserves, it signaled to other central banks that foreign currency reserves—once considered safe—are no longer secure if a country faces sanctions.

Since the beginning of 2022, the central banks of China, Turkey, and India have responded by purchasing 316, 198, and 95 tons of gold, respectively. When central banks buy gold, they typically purchase physical gold rather than financial instruments like gold ETFs, since financial assets could also be subject to sanctions or freezes. Physical gold, on the other hand, remains under their direct control.

However, this trend isn’t just about avoiding sanctions. Even countries with good relations with the West, like Poland, have been increasing their gold reserves. Poland’s central bank has added 167 tons of gold since 2022 and aims to make 20% of its reserves gold-based. Their reasoning is that gold has low correlation with other financial assets, making it a safer hedge against economic risks.

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Hasti: Considering the current economic landscape, how do you anticipate central banks' gold purchasing strategies evolving in the near future?

Hamzeh: Analysts predict that central bank demand will remain robust. J.P. Morgan strategists, for example, expect gold prices to approach $3,000 per ounce in 2025, attributing this rise partly to continued central bank purchases. Similarly, State Street Global Advisors project that gold prices could reach up to $3,100 per ounce in 2025, influenced by sustained central bank demand and increasing consumer interest from countries like India and China. The Economist predicts that central bank demand for gold is unlikely to decline anytime soon. They cite a survey conducted among officials from 51 central banks, in which none expected their gold reserves to decrease in the next three years. Among those surveyed, 56% believed that gold reserves would help shield them from potential sanctions, while 70% saw gold as a hedge against inflation.

Hasti: So, if I understand correctly, central banks are buying gold more for security reasons rather than financial returns. How much does this factor explain recent trends in gold prices?

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Hamzeh: Exactly. Historically, gold prices have had a negative correlation with low-risk financial assets like government bonds. When bond yields (adjusted for inflation) rise, gold prices typically fall, and vice versa. However, this pattern has broken down in recent years.

Since 2022, the real yield on U.S. 10-year Treasury bonds has increased from -1% to 1.8%, yet gold prices have surged. The last time bond yields were this high, gold was priced at $1,000 per ounce—now it’s $2,700.

Moreover, despite soaring gold prices, gold ETFs have not seen significant inflows; in fact, their demand has declined. This suggests that the main driver of gold demand is physical gold, particularly from central banks seeking protection against sanctions.

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Hasti: We’re running out of time, but any final thoughts?

Hamzeh: Gold flourishes in times of uncertainty—whether it's market instability, financial downturns, or geopolitical risks like sanctions. Today, fear is widespread among investors, both private and institutional, and that anxiety is clearly driving gold prices higher. As long as uncertainty persists, gold will continue to serve as a refuge for those seeking stability in an unpredictable financial landscape.