Why the Recent Surge in Gold Prices Is Worrying Central Banks — and Why It Feels Different This Time

Asset price inflation has usually attracted far less anxiety than inflation in everyday goods and services. Among assets, gold has traditionally been the least unsettling: its price movements were widely believed to reflect intrinsic value, scarcity, and its role as a timeless store of wealth. But with dollar-denominated gold prices rising around 60% in 2025 alone — and more than doubling over two years — even central banks are beginning to sound uneasy.

Why the current rise cannot be dismissed as just a weak dollar

Part of the gold rally can indeed be explained by the recent depreciation of the US dollar. Yet this explanation quickly falls short. Gold prices measured in euros rose by over 40% in 2025 and by more than 90% over the past two years. This suggests that the surge is not merely a currency story, but reflects deeper shifts in global asset markets.

The warning has come most clearly from the “Bank for International Settlements”, which has cautioned that such sharp increases point to intensified speculation across asset classes — speculation that can unwind suddenly, with damaging spillovers.

From Bretton Woods to price volatility

For much of the post-war era, such price surges were impossible. Under the Bretton Woods system, the US dollar was pegged to gold at $35 per troy ounce, and other currencies were linked to the dollar. Gold price inflation was effectively ruled out.

That changed in 1971, when US President “Richard Nixon” severed the dollar–gold link, fearing a run on US gold reserves. Once gold ceased to anchor the global monetary system, its price became market-determined — and therefore volatile. In theory, the metal was primed for sharp inflation: supply is constrained by geology and extraction costs, while demand is potentially elastic because gold is durable, liquid, and widely trusted as a store of value.

Why gold prices didn’t explode earlier

Two structural factors long kept gold price inflation in check.

First, central banks — which still hold about 17% of global gold stocks — tend to adjust reserves slowly and conservatively. Even after Bretton Woods collapsed, the US dollar retained its dominance as the world’s primary reserve currency. Safe, liquid dollar assets such as US Treasuries reduced the need for gold as a refuge.

Second, while private investors hold roughly two-thirds of global gold stocks, physical gold is costly and inconvenient to store. This practical constraint limited speculative surges in demand.

Gold as a crisis hedge — a familiar pattern

Even so, gold has repeatedly surged during periods of global stress: the oil shocks of the 1970s, the global financial crisis of 2008, and other episodes of heightened uncertainty. More recently, central banks from emerging economies — including China, India, and Kazakhstan — have steadily increased gold holdings to diversify reserves.

Between 2007 and 2024, gold reserves of emerging and developing countries rose from about 149 million to 357 million troy ounces, while advanced economy holdings remained largely flat. This trend added to medium-term demand, but by itself cannot explain the sudden and dramatic price spike of the last two years.

Financialisation: how gold entered the speculative fast lane

The key difference today lies in the deeper integration of gold into the financial system.

One channel is the rapid growth of “gold-backed exchange traded funds (ETFs)”. These instruments allow retail investors to gain exposure to gold without owning or storing physical metal. As ETF popularity has grown, so has their demand for bullion. Gold held by ETFs jumped by about 20% in just one year, between the third quarters of 2024 and 2025 — a non-trivial shock to demand.

Stablecoins and a new source of demand

An even newer development is the use of gold as backing for digital stablecoins. According to estimates cited by the Financial Times, the stablecoin issuer “Tether” held around 116 tonnes of gold by September 2025 — making it the second-largest holder of gold outside central banks.

These purchases alone accounted for an estimated 2% of global gold demand and 12% of central bank demand in the third quarter of 2025. This further tightened the demand–supply balance, pushing prices higher at the margin.

Why the BIS is uneasy

The result of these shifts is that gold is no longer insulated from herd behaviour. Retail investors, now able to access gold easily through ETFs and digital instruments, are more likely to chase rising prices. When uncertainty rises — geopolitical tensions, sanctions threats, or reserve diversification — gold prices climb. But rising prices themselves then attract more investors, reinforcing the upswing.

This feedback loop makes gold price spikes more speculative than in the past. And where speculation rises, the risk of a sharp correction follows. A sudden reversal would not just hurt individual investors; it could transmit stress across financial markets more broadly.

Why this gold rally feels different

Gold has always been a refuge in turbulent times. What is new is the scale and speed at which financial innovation has pulled it into the heart of modern asset markets. ETFs and stablecoins have lowered barriers, expanded participation, and amplified momentum.

That is why the current surge is unsettling policymakers. Gold may still glitter as a store of value — but it is now far more exposed to speculative excess. On this point, the BIS’s caution appears well-founded.