Temper, tantrums, trust and gold

Gold has been mankind’s ultimate financial refuge since Biblical times. From the treasure vaults of Pharaohs to portfolios of modern ‘masters of the universe’ money managers, the yellow metal has served as an enduring store of value and hedge against upheaval for millennia. Now, that ancient truth is being vividly reasserted amid a mounting crisis of confidence in the US dollar and its financial institutions.

With investors unnerved by political brinkmanship and economic uncertainty, gold has surged to unprecedented heights – recently breaching $3,500 per ounce for the first time. As faith in paper assets erodes, nervous capital is racing into the one asset long trusted when all else fails.

But can a few gestures of reassurance from Washington halt this flight to safety, or have recent events fundamentally altered the calculus of global trust?

At the centre of the storm is a series of policy U-turns by President Trump that were meant to soothe rattled markets. After weeks of railing against Federal Reserve Chair Jerome Powell and threatening to upend trade with China, he abruptly struck a more conciliatory tone. He backed off from firing Powell – despite having branded him a “loser” just days before – and hinted at de-escalating exorbitant tariffs on Chinese goods.

These walk-backs came only after his earlier broadsides prompted a plunge in stock prices and sent the dollar tumbling to a three-year low. The White House clearly hoped that reversing course would stem the panic. Yet one has to ask if these late concessions are enough to restore confidence in American financial stewardship, or something like patching a leaky dam after cracks have already formed.

Any rookie on Wall Street will tell you that the credibility of the Federal Reserve lies at the heart of global trust in the dollar. Yet President Trump publicly attacked the Fed and seriously considered throwing Powell out – crossing a line that no previous administration flirted with. Investors regard an independent Fed as sacrosanct – the guarantor that the dollar will not be manipulated for political ends. Undermine that, even implicitly, and the repercussions can be severe.

Market observers warned that any move to oust Powell would scream an “inflationary” signal, potentially undermining the US dollar’s role as the world’s reserve currency. Even though Trump now insists he has “no intention” of firing the Fed chief, the damage may already be done. Once doubt creeps in about Washington’s commitment to sound money and institutional checks, can the dollar’s decades-long reserve currency prestige remain unscathed? Or will global investors start pricing in a political risk premium on US assets that was unthinkable till now?

Beyond the Federal Reserve issue, the administration’s trade war volte-face raises its own set of questions. After taking the world to the brink of a tariff abyss – with 145pc duties on Chinese imports met by 125pc retaliatory tariffs – Washington is now signaling that such extremes are “unsustainable” and will be rolled back. Markets welcomed these hints of a truce, but the episode reinforced a troubling image of policy whiplash.

Can business and investor confidence be easily rebuilt after witnessing the two largest economies one step away from an all-out trade rupture? The credibility of the US as a stable trading partner (and by extension a reliable keeper of the global financial system) has been called into question. If today’s promise of compromise can tomorrow be reversed with a tweet, how secure should holders of US dollars and Treasuries feel?

It’s telling that China and other nations have been quietly forging alternatives – from bilateral trade in local currencies to increased stockpiling of gold reserves – to reduce their dependence on the dollar. Is the world’s patience with US policy wearing thin, and could we be nearing a tipping point where the dollar’s centrality is no longer taken for granted?

Indeed, there are concrete signs that confidence in the dollar’s supremacy is eroding at the margins. Global central banks have been on a gold-buying spree, accumulating bullion at the fastest pace in half a century. Analysts attribute roughly 70pc of this central bank gold demand to a deliberate strategy of diversifying away from the US dollar. The greenback still underpins most international trade and reserves, no doubt, but its share of official currency reserves has fallen to multi-decade lows.

This gradual drift away from the dollar hints at a fragile trust: a sense that US debt and dollars might no longer be the unquestioned bedrock they once were. If the guardians of the world’s monetary system themselves are hedging their bets – replacing dollar holdings with gold – what message should investors take from that? Could these quiet shifts accelerate if US leadership continues to send mixed signals, turning a slow diversification into a stampede out of paper assets?

In the midst of these uncertainties, gold’s rally has been instructive. The metal has notched record after record, driven by a potent mix of fear and fundamental demand. Of course, no market rises in a straight line. After spiking to historic highs, gold took a breather when a glimmer of good news emerged – such as the White House exempting certain consumer electronics from tariffs, which briefly improved risk sentiment. A bit of optimism was enough to spark some profit-taking; gold pulled back slightly from its peak as a few traders cashed in gains.

But was this dip anything more than a healthy pause?

Even as bullion eased off its intraday high of $3,245 during that respite, analysts noted that the broader environment remained favourable. One commodity strategist observed that despite a short-term “risk-on” mood, the backdrop was still “pretty good for gold” given unresolved risks. In other words, the fundamental drivers that sent gold soaring have not vanished – they have merely been temporarily overshadowed.

When the next jolt of uncertainty inevitably arrives, will gold’s upward march simply resume where it left off?

It is entirely possible, of course, that the gold market is already overextended. After all, gold can be volatile, and if calm and confidence truly return, gold’s shine could dull. For years, predictions of sky-high gold prices have often been dismissed as fringe speculation – the province of eternal doom-mongers. But is it different this time?

There are indications that what was once unthinkable is now being seriously contemplated in mainstream circles. Not long ago, talk of gold at $5,000 an ounce would be waved off as hysteria. Yet today we see respected analysts discussing scenarios where gold could approach $4,500 if current trends intensify, and prominent investors point out that such lofty prices might simply reflect a weaker dollar rather than a stronger gold.

When major banks are raising their gold targets and central bankers are hoarding bullion, the old dismissals ring hollow. It forces one to wonder: Is $5,000 gold still just speculative madness, or simply the logical next step in a world that no longer believes in paper promises?

Copyright Business Recorder, 2025