What Drives Gold’s 2025 Surge?
Alisa Gao
Introduction
The price of gold hit a record high on 17 October 2025 to $4,338.25 per troy ounce, marking an increase of over 50% in just one year (1). The surge has reignited the question: what drives the sustained rise in gold price?
A Rush in ETF: Evidence from Quantile Regression
The World Gold Council points to one answer. In Q3 2025, ETF inflows surged to 221 tonnes, a 134% year-on-year jump, putting financial demand “firmly in the driving seat” (2). However, gold remains an odd market leader: unlike equities, it has no earnings, no cash flows, and no growth narrative. Thus, the recent rush into gold looks irrational, especially at a time when global inflation has cooled and interest rates remain high.
To understand why gold rises despite lacking growth fundamentals, we need to consider it as a hedge or a safe haven that attracts investors when markets are down. Baur and Lucey (2010) defined a hedge as “an asset that is uncorrelated or negatively correlated with another asset or portfolio on average”, and a safe haven as “an asset that is uncorrelated or negatively correlated with another asset or portfolio in times of market stress or turmoil.” (3). The year 2025 is marked by heightened geopolitical instability and trade uncertainty, causing severe decline in stock market index and increasing the demand for safe assets.
Following their framework, I estimate a quantile regression between the returns from stocks and gold.
r(gold,t) = α + β1 r(stock,t) + β2 r(stock,t(q)) + ε(t)
The dataset consists of daily S&P500 and LBMA gold prices from 2 January to 18 November 2025, with a one-day lag included to detect delayed market responses.
β1 measures gold’s average hedging relationship with stocks, while β2 captures its safe-haven role under extreme stock market declines. It only takes effect when daily returns of S&P500
drop below 1%, 2%, and 3% in a day.
Findings
Table 1, 2 and 3 demonstrates the regression result with S&P500 chosen quantile decline of 1%, 2% and 3% respectively.
Results from Table 1-3 indicate that gold behaves as a hedge on average, as the β1 coefficients are consistently close to zero and statistically insignificant across all thresholds.
Under mild market stress - 1% and 2% daily declines - the β2 coefficients are negative and marginally significant (p = 0.0552 and 0.0759), suggesting a weak safe-haven role. However, under more extreme market stress (3% shocks), both contemporaneous coefficient β2 and lagged coefficient β2 (t+1) become statistically insignificant with higher p-value (p = 0.826 and p = 0.987). One plausible explanation is that investors may shift toward alternative hedging instruments with stronger convexity or leverage exposure - such as VIX indexes (4). Gold’s traditional safe-haven function fades when stress becomes too extreme.
This finding stands in contrast with Baur and Lucey’s (2010) findings for the 1995 - 2005 period, which identified gold as a safe-haven only under episodes of extreme volatility (5).
Across all thresholds, lagged responses (t+1) remain insignificant. This may suggest that the market adjusts almost instantaneously to shocks, and any hedging or rebalancing behaviour takes place in an instant.
Evaluation
While the model captures gold’s asymmetric response during market downturns, it does not account for other determinants of gold prices, such as changes in real interest rates and inflation expectation. Empirical evidence from past easing cycles shows that gold prices tend to rise following sustained declines in interest rates (6). However, gold may not react strongly to a single policy cut; its price often adjusts in advance as markets form expectations about future policy. Gold prices continued to climb prior to 17 September 2025, when Chair Powell announced a 25-basis-point cut, but fluctuated once the cut was implemented (7). This may indicate that rate-cut expectations had already been priced in, limiting the immediate post-announcement reaction - a typical pattern when realised policy actions align with prior expectations. Nonetheless, it would be overly simplistic to draw a definite causal relationship between gold and any single factor, whether interest rates or equity markets, as gold prices are jointly shaped by multiple forces, and market expectations around these factors are often difficult to quantify.
Central Banks: The Second Engine
Central banks are another major force behind the inflated gold prices. Quarterly purchases hit 220 tonnes in Q3 2025, up 28% from the previous quarter, and strongest buyers this year include Poland, Kazakhstan, Turkey and China (8). While central banks typically accumulate gold to hedge against currency depreciation and reserve-asset risk, this year’s surge increasingly points to a shift away from the US dollar amid uncertainty surrounding Trump’s Tariff Act. China, who stands in strategic opposition to the US, has been steadily adding to its gold reserves while selling US Treasury holdings (9). As Jeff Currie of Carlyle told Financial Times, “China is buying gold as part of their de-dollarisation strategy. ” (10). Some unofficial estimates place China’s real gold stockpile near 5,500 tonnes (11). Not only in the case of China, emerging economies such as India also show a preference of gold over dollars: U.S. Treasury statistics show an 8% reduction in India’s Treasury holdings over the past year, alongside an accumulation of 600 kilograms of gold (12).
Conclusion
ETF inflows and demand from central banks form the two key forces behind the rapid rise in gold price. Econometric results show that gold is a hedge for stock, a weak safe haven during mild stock market crashes, and the lagged response of gold is insignificant. Furthermore, the accelerating accumulation of gold by central banks reflects uncertainty over the global economy. In particular, the movement away from dollars toward gold in Southern countries in particular could be a long-term strategic “de-dollarisation” and a search for financial independence. However, it is important to recognise that real-world gold demand is influenced by a wide range of forces that interact in complex ways, making it difficult to attribute price movements to any single driver. Overall, gold’s traditional role as a stable store of value still shines in today’s digital economies - albeit in a different way.
References:
1. “LBMA Precious Metal Prices,” LBMA, 2025, https://www.lbma.org.uk/prices-and-data/precious-metal-prices?.
2. World Gold Council, “Gold Demand Trends: Q3 2025,” World Gold Council, October 30, 2025, https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2025?
3. Dirk G. Baur and Brian M. Lucey, “Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold,” Financial Review 45, no. 2 (May 2010): 217–29, https://doi.org/10.1111/j.1540-6288.2010.00244.x.
4. Matthew Hood and Farooq Malik, “Is Gold the Best Hedge and a Safe Haven under Changing Stock Market Volatility?,” Review of Financial Economics 22, no. 2 (April 2013): 47–52, https://doi.org/10.1016/j.rfe.2013.03.001.
5. Dirk G. Baur and Brian M. Lucey, “Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold,” Financial Review 45, no. 2 (May 2010): 217–29, https://doi.org/10.1111/j.1540-6288.2010.00244.x.
6. Auronum, “The Fed’s Influence on Gold Prices: What Happens after Interest Rate Cuts,” Auronum, November 18, 2024, https://auronum.co.uk/the-feds-influence-on-gold-prices-what-happens-after-interest-rate-cuts/.
7. “LBMA Precious Metal Prices,” LBMA, 2025, https://www.lbma.org.uk/prices-and-data/precious-metal-prices?utm_source=chatgpt.com#/.
8. World Gold Council, “Gold Demand Trends: Q3 2025,” World Gold Council, October 30, 2025, https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2025?
9. Krishan Gopaul, “Central Bank Gold Statistics: Central Bank Gold Buying Rebounds in August,” World Gold Council, 2025, https://www.gold.org/goldhub/gold-focus/2025/10/central-bank-gold-statistics-central-bank-gold-buying-rebounds-august.
10. Leslie Hook, “China’s Secretive Gold Purchases Help Fuel Record Rally,” @FinancialTimes (Financial Times, November 14, 2025), https://www.ft.com/content/b77a95b0-ee74-4bde-b11f-32ee0fe03cd8.
11. Tim Treadgold, “China Chases Gold Supremacy as It Builds a U.S. Dollar Alternative,” Forbes, November 17, 2025, https://www.forbes.com/sites/timtreadgold/2025/11/17/china-chases-gold-supremacy-as-it-builds-a-us-dollar-alternative/.
12. TOI Business Desk, “Gold Reserves vs Dollar Assets: Why Is RBI Buying Gold & Reducing Investments in US Treasury Securities - Top Points to Know,” The Times of India (The Times Of India, October 24, 2025), https://timesofindia.indiatimes.com/business/india-business/gold-reserves-vs-dollar-assets-why-is-rbi-buying-gold-reducing-investments-in-us-treasury-securities-top-points-to-know/articleshow/124783601.cms?
13. Chu Daye, “China Trims Holdings of US Treasury Bonds in September, the 5th Monthly Reduction This Year - Global Times,” Globaltimes.cn, 2025, https://www.globaltimes.cn/page/202511/1348564.shtml.
