Geopolitical reflection

Gold’s wild ride is about more than markets in a multipolar world

Gold’s recent volatile fluctuations after prices touched record highs have led many investors to wonder whether the rally has finally run out of steam.

The answer to whether gold still has room to rise is neither a simple yes nor no. Instead, gold’s surge, and its volatility, should be taken as a reflection of something far bigger than short-term market sentiment. It represents a broader structural shift away from the dollar-centric financial system amid geopolitical risk, which began years ago and is still unfolding today, alongside the gradual transition from a United States-dominated unipolar world to a multipolar one.

For decades after the Cold War, the US was the dominant global power. The dollar became the foundation of the international monetary system. After former US president Richard Nixon ended the gold convertibility of the dollar in 1971, the world gradually moved to a purely fiat currency system. In the 1970s, the US suffered high inflation, but under then Federal Reserve chairman Paul Volcker, inflation was eventually tamed through extremely high interest rates and a painful recession. From the late 1980s until the global financial crisis in 2008, confidence in the dollar was strong.

The US was the sole superpower. The dollar was treated almost like gold — except better, because it paid interest. Central banks sold gold and investors ignored it as they saw little reason to hold a metal that produced no income. Gold was useful for jewelry and industry, but no longer central to the monetary system.

The turning point came with the global financial crisis. That confidence began to crack after the financial crisis exposed structural vulnerabilities in the US economy and in the broader financial system. It weakened further as the US’ recent financial sanctions turned the dollar-based payment system into a geopolitical tool. At the same time, the global balance of power was shifting.

In terms of purchasing power parity, China’s economy surpassed that of the US around 2014, according to the International Monetary Fund. As emerging economies, including the BRICS countries, gained economic and political weight in global trade and production, trust in a single country’s currency as the backbone of the global financial system began to erode.

This geopolitical shift has profound monetary consequences.

Money ultimately depends on trust. In a world without gold backing, currencies are sustained by confidence in governments and institutions. But when financial sanctions become a tool of foreign policy, as we have seen in recent years, countries begin to ask a simple question: Is the current payment system neutral and secure?

The US controls the dominant global payment infrastructure, including the SWIFT system. When a country is excluded from this system, it faces enormous economic disruption. As a result, many nations have begun exploring alternative payment arrangements and increasing their gold reserves as gold is politically neutral, it carries no sovereign credit risk, and it does not depend on another country’s promise. This demand is patient and structural, not speculative.

What changed recently is that retail investors finally noticed.

Trade tensions, rising fiscal risks in the US and signs of stress in bond markets pushed gold from a central-bank story into a headline trade. For example, during recent market turbulence, US Treasury bonds did not always behave as the ultimate safe haven. At one point, US bond prices fell while German bond prices rose — an unusual development that suggested global investors were reassessing risk perceptions.

Meanwhile, US fiscal dynamics have become more strained. When a country consistently borrows heavily to finance consumption and interest payments rise sharply, markets inevitably begin to question sustainability. The US has long enjoyed the privilege of issuing the world’s reserve currency, but that privilege depends on confidence. If that confidence weakens even marginally, demand for alternatives — including gold — naturally increases.

That shift helps explain both the surge and the subsequent drop in two layers of demand. First, central banks continue to buy gold. Second, retail investors have entered the market in large numbers — through exchange-traded products and purchases of physical gold. In some cases, investors are reacting not only to macroeconomic fundamentals but also to price momentum. When prices rise rapidly, more people join the trend.

Gold doesn’t generate earnings or dividends. Its price depends entirely on what people are willing to pay. In that sense, gold always has “bubble-like” characteristics. When enthusiasm builds, prices can overshoot. If investors buy at extremely elevated levels, they may suffer losses when the market corrects. Therefore, for short-term participants, timing is dangerous. Many enter because they see prices rising; few know when to exit.

But short-term volatility does not necessarily invalidate the long-term structural case.

If global instability persists, if the dollar’s dominance continues to be questioned, and if alternative payment systems gain traction, even gradually, gold’s role as a monetary anchor could expand further. As the world transitions from a unipolar to a multipolar financial architecture, gold naturally regains importance.

Related dynamics are also seen in other precious metals. Still, gold remains the primary monetary metal. The central driver is not industrial demand but the reallocation of reserves and the reassessment of currency risk.

To be clear, the dollar remains deeply embedded in global trade and finance. But the trajectory matters. If the share of global trade settled through dollar-based systems gradually declines and the geopolitical order shifts toward multipolarity more, gold’s strategic value rises correspondingly.

Today’s volatility may continue as corrections are normal in any market. But until the underlying structural forces reverse — until the global order becomes more stable and trust in the existing monetary architecture is fully restored — gold still has room to rise.

The path will not be smooth, but the deeper story is about the future shape of the global monetary system.

The author is a professor of accounting and finance at the Cheung Kong Graduate School of Business.

The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.