The immediate reason for the unprecedented surge in the gold price (see the chart below) is an increase in the demand for gold. But before we look at what has caused this increase in demand, let us take a look at the characteristics of gold.

The gold price has soared in 2025. The price is now twice as high as in 2023, and fourteen time higher than in year 2000. The prices in the chart are in US dollar per ounce troy, which is around 31 grams. It is based on data from the World Bank. The data for 2025 is the price on October 5.

As is the case for all goods, the gold price is in the short term determined by demand and supply. However, as gold is a commodity that is produced, its price is in the long term determined by the cost of production, including all the costs: prospecting, planning, capital investment, operational costs and decommissioning costs, once the mine is exhausted. If the price is higher than this cost of production, production will increase. If it is lower, production will decrease.

This is the basic logic of it. However, in the real world there is a long time lag between the jump in price and the increase of production, as geological prospecting and environmental impact studies have to be carried out, permits have to be emitted, and the equipment has to be acquired and installed. This will typically take 7-10 or even 15 years. So it is not quick. When the price falls to below the full cost of production, the reduction in production is not immediate either, as the mining companies will continue to operate as long as the price is higher than the operating costs. If the price can not even cover the operating costs, the mining company will close down the mine, temporarily or permanently.

As all mining companies (and oil companies), gold miners go first for the most attractive deposits in terms of the accessibility and the grade of the ore (gold per tonne of ore). When these deposits are not enough, they look for new ones, normally harder (and more expensive) to exploit. Sometimes new, rich deposits are discovered, but it is increasingly rare, and when found, they tend to be small. Over time, the mining and processing technology also develops, making less attractive deposits more profitable. But generally, the cost of production at new mines has tended to go up over time, as the best deposits have been exploited and poorer ones are developed. To this come stricter social and environmental regulations, including climate change regulations. To get an idea, a gold mine is considered “good” if the gold content of the ore is 8-10 gram per ton in an underground mine and over 1.5 gram per ton in an open pit mine! This means that gold mining produces an enormous amount of waste.

The profitability of the mining activities depends on the quality of the ore that is exploited. As the price is determined by the least attractive deposits in operation, all companies with more favourable deposits will have wind-fall gains (called rents). Some countries therefore tax these rents higher than normal operating profits.

Then to the demand side. Gold is almost exclusively bought as an investment (gold bars or coins) or for production of jewellery (more or less in equal amounts). There is a small industrial demand from for example the electronics industry, but due to the high price of gold, other, cheaper, metals are normally preferred (for example copper and silver). Gold, once produced, tends to continue to exist for ever (while many others degrade over time, as for example iron and copper which oxidize. This means that all new production adds to the existing inventory of gold in the world, mostly as gold bars, coins and jewellery.

It is estimated that presently, there is a stock of a little more than 210,000 tonnes of gold in the world, of which a little more than half is in the form of jewellery and the other half is as gold bars and coins owned by Central Banks and individuals, of which a minor part via investment funds.

The recent increase in demand comes particularly from two sources: Central banks and Investment Funds. Central Banks have been adding around 1,000 tonnes a year in the last three years and now have an estimated 36,000 tonnes in their vaults. The buying seems to continue and the value of the Central Banks’ physical gold holdings is now bigger than their holdings of US treasuries. At the same time, Central Banks which for convenience have held their gold in deposits in the US and UK, are for security reasons now increasingly repatriating this gold (it is claimed that Central Banks are now storing two-thirds of their gold at home).

Gold bars in the vaults of Bank of England. Photo from Bank of England.

This increase in demand reflects mainly two things: firstly, gold is seen as a secure asset in turbulent times, and secondly, there is an increasingly widespread doubt about the security of dollar assets, both among Central Bankers and the wider population. As gold in itself does not produce any yield, this is a sign that Central Banks (and many individuals) or now more concerned about the security of their investement than about the yield.

As the long term gold price is determined by production costs and these costs are increasing, as less attractive new deposits are brought into operation, it is increasingly likely that the gold price in the long term will continue to rise (if demand, as expected, continues to be high). The present surge in the gold price is therefore not likely to be a bubble, ready to burst. Even so, in the short term the price may go abruptly up or down.

This tells us something about the state of the world and the world economy. We are witnessing a tectonic shift, where the US based world order and the role of the dollar is eroding. Faster than I would have thought until recently. And we can still barely see the contour of what is coming.

In Asia, there is traditionally a high demand for gold jewellery. According to some estimates, private households  in India hold a total of 25,000 tons of gold, mainly as jewellery. That is almost thirty times more than the gold holdings in India’s Central Bank. Photo: Jewellery shop in India. Wikimedia.

This has let some to conclude that the “gold standard’ (linking the national currency directly to an amount of gold) from the past should be brought back from the grave. The ultra libertarian “Austrian School” advocates for the return to the gold standard, it was advocated by the late French President Charles de Gaulle (to get rid of the US dominance), and it is presently supported in the US by the founder of Forbes Media, Steve Forbes, and several of Trump’s candidates for the Federal Reserve Board. It is included in “Project 2025”, a manifesto drawn up by the conservative Heritage Foundation as a political basis for Trump’s 2024 election campaign. However, it is highly unlikely to happen, because it would lead to falling prices (deflation), as the gold price continues to go up relative to other goods. On the other hand, the idea to link an international currency to some physical assets and not only base it on trust (“fiat money”) may not be entirely unrealistic, if a broader commodity basket is used as its base. It would require complicated international agreements to be put into place, so it is not very likely to happen in the short term (even so, BRICS is toying with this idea).

Sweden, Denmark and (later) Norway established in 1873 a gold based common currency: the golden crown (krone). One krone was fixed at 0.403 grams of gold. It could be used freely in all three countries. The "Scandinavian Currency Union" lasted to the outbreak of the first World War. The 20 kroner coin to the left is Swedish and that to the right is Danish. Photo from Wikipedia.

I agree with those who say that the existing world order will not be followed by a new world order, but rather by a general lack of order in a multi-polar world. No new hegemonic state will take over from the US, and no other national currency will take the place of the US dollar. As the existing international governance institutions were created based on the US and the fading “great powers” (UK, France and the now extinct Soviet Union), and the international financial institutions were created based on the US dollar (IMF, World Bank, Regional Development Banks, Bank for International Settlements and so on), there is in this brave new world an institutional void. It is an open question, whether the existing institutions can be reformed and revitalised to serve their purpose in the future, as Chinese Premier Li Qiang proposed at the UN General Assembly in September 2025.

Meanwhile, we are likely to see a fragmented world “system” with several different regional power centres, loose alliances and negotiated agreements. This includes defence alliances, trade agreements, financial settlement systems and so on. It is difficult to predict, where that will bring the world in the longer term. Hopefully not to war, as several EU country governments seem to think – and which risks becoming a self-fulfilling prophecy.

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Note:

The global production of gold in 2024 is estimated at 3,300-3,600 tonnes. The biggest producers were China (380 t), Russia (330 t), Australia (284 t), Canada (202 t) and the US (158 t). The biggest proven mining reserves are in Australia and Russia (12,000 tonnes each), South Africa (5,000 t), Indonesia (3,600 t), Canada (3,200 t), China (3,100 t) and the US (3,000 t). The data are from the U.S. Geological Surveys. Reserves are probably considerably bigger, as vast geographical areas have not been thoroughly explored yet. Furthermore, as the gold price goes up, poorer deposits will be reclasified as proven reserves.