Central banks

Published on
02/09/2025 – 13:52 GMT+2

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Gold jumped to a record $3,508.50 (€3,015.08) an ounce on Tuesday, fuelled by expectations of a US Federal Reserve rate cut and mounting uncertainty for investors.

The precious metal is seen as a haven for investors, with demand for it surging when trust in the stability of paper currencies or financial markets dips.

Earlier this year, gold prices surged when US President Donald Trump announced a raft of controversial tariffs against other countries.

Gold’s record-high value underscores deep unease over the global outlook and questions about the Fed’s independence as US President Donald Trump ramps up pressure on policymakers.

Dollar is no longer the ‘gold standard’

The rise in gold prices has come as part of a multiyear rally for precious metals.

Central banks from Asia to the Middle East have been accelerating their purchases for the fourth year in a row, adding a powerful tailwind to prices, with predictions being that at least 1,000 metric tonnes of gold will be purchased by governments for their gold reserves.

The move reveals a decreasing reliance on the US dollar at a time when Washington’s fiscal trajectory and political battles are clouding its standing as the world’s reserve currency.

A survey of 73 central banks conducted by the World Gold Council revealed that 95% of them are expected to increase their gold holdings over the next 12 months, while nearly three-quarters of them are anticipated to shrink their dollar reserves.

China, who is still locked in negotiations with the US over a more favourable trade deal, has been accumulating gold on a monthly basis, recording its ninth straight month of purchases in July.

De-dollarisation will hurt the world’s most reliable currency

For much of modern history, most national currencies were tied directly to gold — namely, governments guaranteed that paper money could be exchanged for a fixed weight of gold they had stored in their reserves.

Everyday transactions were carried out with paper money because it was far simpler than calculating gold values or carrying bullion, while governments backed those notes with gold held securely in their vaults.

After World War II, dozens of Allied nations gathered in Bretton Woods in New Hampshire to host the United Nations Monetary and Financial Conference.

They decided to create the International Monetary Fund and the World Bank, and established a system where the US dollar was pegged to gold at $35 an ounce.

In other words, one dollar represented 1/35th of an ounce. At the time, this peg gave the dollar unmatched credibility because the US then held most of the world’s gold reserves.

It provided stability for global trade and investment for about 27 years, until the US abandoned the gold peg in 1971, collapsing the Bretton Woods system.

Ghosts of Bretton Woods

Bretton Woods collapsed in 1971 when the US deficit and inflation drained gold reserves, making the $35 peg unsustainable.

President Richard Nixon ended dollar convertibility at the time, forcing currencies to float freely.

Once currencies began floating after Bretton Woods, foreign exchange or Forex markets became the arena where their values were set.

Instead of governments guaranteeing fixed rates, traders, banks and central banks now buy and sell currencies against one another, with prices at times shifting by the second.

Now, US policies are once again influencing the gold-buying habits of central banks, and it is particularly symbolic that gold has surged past $3,500 an ounce — an increase of more than 10,000% from the $35 peg set under Bretton Woods after World War II.

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Leading European stock markets reflected a cautiously positive sentiment on Friday as investors watched for progress on Ukraine peace talks and awaited a speech from US Federal Reserve chair Jerome Powell. He will speak on Friday at Jackson Hole, where central bankers gather for their annual meeting. 

Markets also digested details of an EU-US trade truce and better-than-expected business activity data, announced on Thursday.

Despite the news that the German economy shrank more than initially estimated in the second quarter, the German DAX changed direction and made up its earlier losses, gaining around 0.1% after 11.00 CEST.

The FTSE 100, though trading in negative territory all morning, also followed suit and changed course, gaining a few points by late morning.

The Paris CAC 40 was up 0.2%, the Madrid IBEX 35 rose by 0.4%, and the European benchmark STOXX 600 increased by 0.2%. 

As for the London blue chip index, the early morning slight dip appeared to be just a small correction. “The FTSE 100 saw a subdued start on Friday after achieving a record close above 9,300 yesterday,” said AJ Bell investment analyst Dan Coatsworth in his note.

Investors are focusing on the message Federal Reserve chair Jerome Powell might deliver at the Jackson Hole summit in Wyoming.

“Investors had been expecting a rate cut from the Fed next month so if Powell were to say anything suggesting rates might be kept on hold, it could see stocks come under greater pressure,” said Coatsworth. He added that robust PMI data from the US on Thursday pointed to a strong economy, potentially reducing the chances of the Fed lowering borrowing costs.

A cut in interest rates would be the first of the year and it would give asset prices and the economy a boost — but it could also risk worsening inflation.

The Fed has been hesitant to cut interest rates this year out of fear that President Donald Trump’s tariffs could push inflation higher, but a surprisingly weak report on employment growth earlier this month suddenly shifted focus towards the job market. Trump, meanwhile, has forcefully pushed for cuts to interest rates, directing fierce criticism towards Powell.

US markets closed in a gloomy mood

On Wall Street on Thursday, the S&P 500 slipped 0.4% to 6,370.17, continuing a gradual decline since a record on 14 August. The Dow Jones Industrial Average dropped 0.3% to 44,875.50, and the Nasdaq composite fell 0.3% to 21,100.31.

In other dealings early on Friday, the US dollar rose to 148.48 Japanese yen, from 148.37 yen. The euro slipped to $1.1590 from $1.1606.

Meanwhile, oil prices fell by midday in Europe; the US benchmark crude lost 0.2% and was traded at $63.38 per barrel. Brent crude, the international standard, also was down by 0.2% at $67.52 per barrel.

Oil prices moved higher yesterday, “as the initial enthusiasm over progress towards a ceasefire between Russia and Ukraine continues to fade”, said ING in a note. Expectations of increased global uncertainty are driven by the difficulties of setting up a Putin-Zelensky summit and securing potential security guarantees for Ukraine.

Asian markets were also mixed on Friday

Asian shares were also mixed on Friday. In Tokyo, the Nikkei 225 rose less than 0.1% to 42,633.29 after Japan’s core inflation rate slowed to 3.1% in July, from 3.3% in June.

ING Economics said in a note that price pressures were broadly in line with market consensus. Inflation staying above 3% raises the likelihood of a rate hike as soon as October, it said.

In Chinese markets, Hong Kong’s Hang Seng index rose 0.9% to 25,339.14. The Shanghai composite index climbed 1.5% to 3,825.76.

South Korea’s Kospi added 0.9% to 3,168.73. Australia’s S&P/ASX 200 fell 0.6% to 8,967.40 as traders sold to lock in gains after the benchmark surged to record highs in recent trading sessions.