In February 2024, the last time I wrote a post making a plea for increased gold prices, the yellow metal traded at around $2,000/oz. In March 17th of this year, this spot price rose above $3,000/oz, an all time high even compared to the inflation-adjusted price reached $2,646/oz.
Physical Gold Demand supply-demand balance in 2024
- Total physical gold demand reached 4,974 metric tons in 2024, setting an unprecedented record, while physical gold supply increased by only 1% (4,974.5 metric tons), according to the World Gold Council. Mine production responded positively to higher prices, but supply remains too rigid in the short to medium term to increase significantly.
- Investment demand for gold and Central Bank Purchases were the primary drivers of growth in physical gold demand, standing at 1,179.5 metric tons and 1,000 metric tons, respectively (almost 50% of total demand). When breaking down the origin of investment demand for gold, it becomes clear that Over-the-Counter (OTC) demand was far more dynamic than gold-backed exchange-traded funds (ETFs). In fact, OTC demand accounted for nearly the entire growth in total investment demand for gold in 2024, increasing by 25%.
- A secondary but increasingly dynamic demand for gold comes from electronics. In 2024, 326.1 metric tons of gold were consumed in electronics applications. Often overlooked, gold is also an industrial commodity, transformed in various manufacturing processes. Its properties, such as resistance to corrosion and excellent conductivity, make it an essential input in the production of printed circuit boards, connectors, contacts, memory devices, switches, and relays. The boom in Artificial Intelligence (AI) has driven and will continue to fuel growth in this demand segment.
- By contrast, the primary application of gold demand—jewelry—declined by 11% in 2024 to 1,877.1 metric tons, likely due to a negative reaction to skyrocketing prices.
The Factors Behind the 2024 and Future Price Rise
- Since the US Federal Reserve began tightening its monetary policy, 10-year real interest rates have re-entered positive territory, while gold prices have increased significantly. These developments would have been unthinkable before 2022. They reflect the growing importance of Central Banks, which have reversed a 60-year trend of declining gold holdings as a percentage of their total reserves (although the ratio remains very low). Notably, in 2024, Central Banks outside the G7 purchased approximately double the tonnage of physical gold each month compared to the period before the sanctions against Russia in early 2022. Traditional non-Western buyers of gold, such as Russia and China’s central banks, have been joined by other emerging countries like Turkey, Singapore, and Saudi Arabia.
- Mounting doubts about the reliability of the US dollar as a wealth preservation tool, following US sanctions on Russia, have led Central Banks in these countries to dump, freeze, or slow down their purchases of US-denominated reserves (US Treasuries) in favor of diversifying their portfolios with gold. These doubts persist and are likely to remain even if the sanctions are lifted.
- The long-term unsustainable path of US federal debt is also a critical issue, and the problem is likely to worsen given the new US administration’s economic policies. The fiscal policy of President Donald Trump alone—extending the expiring 2017 Tax Cuts and Jobs Act (primarily affecting households, as corporate tax cuts are already permanent)—will result in $4.2trn loss in revenues over the 2026-2035 period (around $400bn in annual revenue losses). This far exceeds the revenues promised by the implementation of tariffs and any reasonable estimate of spending cuts proposed by the DOGE (Department of Government Efficiency). Additionally, the structure and maturity of US federal debt exacerbate its counterparty risk. Treasury bills now account for 22% of debt, above the recommended 15-20% range. This means a significant portion of the short-term debt issued between 2022 and today will need to be repaid and refinanced in the coming years.
- When counterparty risk rises on debt products, it ultimately benefits gold. This is particularly true in the late stages of debt cycles, where the developed world currently finds itself. The monetary value of US gold reserves to the US M2 broad money supply ratio—essentially a ratio of gold to credit assets—has historically risen sharply at the end of each debt cycle after dipping to a low level. In 2022, this ratio stood at 2.5%, the same year gold prices began to rise despite higher real interest rates and a stronger US dollar. Gold prices have now broken through their resistance level of around $2,000/oz.
- Lastly, the gap between the paper gold market and available physical gold supply is a ticking time bomb that will sooner or later accelerate the upward trend in gold prices. The paper gold market is highly leveraged, with 200 to 300 paper gold ounces backed by one ounce of physical gold. This inverted pyramid can stand as long as bullion banks (primarily commercial banks) have reliable and constant access to physical gold to honor their delivery commitments, and as long as too many paper gold product holders do not simultaneously claim the physical gold they are entitled to. If these two conditions are met, spot gold prices remain stable because the sheer volume of short (selling) positions in paper gold by bullion banks limits price increases (paper gold supply acts as a substitute for actual physical gold supply).
However, these conditions are slowly but surely being undermined. First, most bullion banks’ ability to satisfy physical deliveries relies on physical gold lease contracts with Western Central Banks, notably the Bank of England and the Federal Reserve Bank of New York. But these banks are increasingly reluctant to roll over lease contracts, likely because their gold stocks are already very low, effectively reducing the supply of physical gold. Second, one or more major holders of paper gold may be encouraged to claim their physical assets given the current macroeconomic and geopolitical conditions. As a result, bullion banks are under pressure on both the supply and demand sides, which could lead to a failure to satisfy gold claims. This would trigger a collapse of paper gold products and a spike in gold prices as more paper gold holders rush to claim their bullion bars.
Conclusion
The situation will evolve rapidly over the next two to three years. In the meantime, it is never too late to buy physical gold as a form of monetary insurance (protection against global events and monetary inflation), as the true price of gold—and, symmetrically, the true value of currencies—has yet to be fully discovered.