Gold hits three-month high as dollar weakness fuels rally

LAHORE: Gold is climbing back into territory it has not seen since spring. Spot gold rose to $4,680.70 an ounce on Monday, its highest level in more than three months, before settling at $4,639.49.

It has gained more than 5% over the past week and is up more than 15% this month, extending a recovery that has taken the metal well above the lows reached earlier this year.

The move is striking given where gold has been. The metal reached an all-time high of about $5,595 an ounce in January, before undergoing a major sell-off that took it below $4,000 in June. By August, it had recovered to around $4,400.

Now, with gold back above $4,600, investors are reassessing what is behind the latest leg of the rally.

There are several factors coming together, but the immediate catalyst has been the US dollar.

Analysts say the dollar's recent weakness is providing an important boost to gold. Speaking to Pakistan TV Digital, Waqas Ghani, Head of Research at JS Global, said the US Treasury's decision to at least double its purchases of longer-dated government bonds is helping drive the move.

The program is aimed at supporting liquidity and bringing down borrowing costs at the longer end of the Treasury market, but it has also unsettled currency markets and renewed concerns over the US fiscal outlook and the longer-term value of the dollar.

For gold, that has a direct impact. A weaker dollar makes bullion cheaper for buyers holding other currencies, while growing concerns over the purchasing power of the US currency can make gold more attractive as a store of value.

Ghani's comments also point to the return of what investors call the “debasement trade,” the idea of moving into assets that can preserve value when confidence in fiat currencies weakens.

Gold, with no direct link to the finances of any single government, is one of the main beneficiaries of that trade.

Still, interest rates remain a key counterweight.

Gold does not generate income, so higher rates and bond yields can make the metal less attractive compared with interest-bearing assets. That is why markets are closely watching US inflation data and Federal Reserve Chair Kevin Warsh's comments for clues about the path of monetary policy.

A shift toward lower rates could provide further support for gold, while a higher-for-longer rate environment could limit the rally.

The rally is also being supported by a recovery in physical and investment demand.

China remains an important part of that picture. The People's Bank of China added 20 tonnes of gold in July, taking its reserves to 2,366 tonnes and extending its buying streak to 21 consecutive months. It was the country's largest monthly purchase since October 2023.

Central banks more broadly bought around 289 tonnes in the second quarter, a record for that period. The broader picture, however, is less uniform. First-half central-bank purchases were weaker than in previous years because some countries also sold gold.

The recovery in official-sector demand is therefore significant, but it is not universal.

Investment demand is showing signs of returning as well. Gold-backed ETFs recorded roughly $3 billion in net inflows in July, reversing two months of outflows, with combined holdings rising above 4,000 tonnes.

More recently, ETF inflows accelerated sharply. Gold-backed funds took in 46.7 tonnes, worth about $6.4 billion, in the week through August 21, their biggest weekly inflow in 10 months.

Technical signals are adding to the momentum.

Gold has broken through several important resistance levels, including its 200-day moving average, suggesting that the rally is attracting momentum-oriented buyers as well.

HSBC's chief precious-metals analyst James Steel has said the scale of the move could point to increased activity from central banks or sovereign wealth funds, although there is still no confirmed data identifying specific major buyers.

Taken together, the ingredients of the rally are fairly clear: a weaker dollar, renewed concerns over the US fiscal outlook, changing expectations for interest rates, continued central-bank accumulation and a return of investor demand.

Complicated safe-haven

Gold is traditionally viewed as a refuge during periods of war, financial stress and inflation. Yet when the Iran conflict began, the metal initially fell sharply.

That apparent contradiction was a reminder that gold does not necessarily rise during the first stage of a crisis.

When markets are hit by a sudden shock, investors often need cash. They sell assets, including gold, to raise liquidity. The Iran conflict also sent oil prices sharply higher, increasing concerns about inflation.

For the Federal Reserve, that raised the possibility of keeping interest rates higher for longer, another factor that works against gold.

The result was an unusually painful period for bullion. Gold fell about 14% in the second quarter, its largest quarterly decline since 2013, while gold ETFs lost roughly 45 tonnes of metal.

The episode exposed a weakness in the simplest version of the safe-haven story.

Gold may protect investors from a loss of purchasing power or financial instability, but it is not immune to the immediate mechanics of a market panic. If investors need liquidity, or if a geopolitical shock drives inflation and interest-rate expectations higher, gold can fall even as the crisis itself deepens.

That is what makes the current rally more interesting.

The geopolitical backdrop has hardly disappeared. The Trump administration has threatened Iran with what it described as the “greatest financial offensive ever marshalled,” while Washington is expanding sanctions aimed at Iran and warning countries and companies that continue doing business with Tehran.

Treasury Secretary Scott Bessent has also signaled further pressure on Iran's remaining economic channels.

Yet this time, gold is rising rather than falling.

The difference is that investors are looking beyond the immediate shock. The market is focusing on what geopolitical tensions could mean for currencies, government finances, inflation, interest rates and the wider monetary system.

That may be changing the way gold's safe-haven role is understood.

The traditional trade is straightforward: war creates uncertainty, so investors buy gold.

The events of this year have shown that the relationship is more complicated. A crisis can initially push investors toward cash, while higher oil prices and inflation can strengthen the case for higher interest rates, both negative for bullion.

But once the immediate panic fades, the focus can shift to the financial consequences of the crisis.

If investors become concerned about currency weakness, government debt, inflation or the purchasing power of fiat money, gold can become attractive again.

That is increasingly what the current market is showing.

Gold is not simply being used as insurance against the outbreak of a war. It is also being used as insurance against what the crisis does to the financial system afterward.

That helps explain the metal's unusual journey this year, from roughly $5,595 in January, below $4,000 in June, around $4,400 in August, and now back above $4,600.

The three-month high is therefore more than a price milestone. It reflects a broader shift in what investors are asking gold to protect them from.

And for now, that demand is strong enough to keep the metal moving higher.