[Financial Planning for the 100-Year Life] Soaring Gold Prices: Long-Term Rise Expected Despite Corrections

Recently, the price of gold at the New York Mercantile Exchange surpassed $2,900 per ounce for the first time in history. Considering the factors that determine the price of gold, even if there are short-term adjustments, the price is likely to rise in the long term.

The most important factors determining the price of gold are the Dollar Index, along with U.S. interest rates and inflation. Since gold prices are quoted in dollars, a decline in the value of the dollar leads to an increase in gold prices. When U.S. interest rates (10-year Treasury yields) fall, the dollar value decreases and gold prices rise. Gold is one of the assets that can hedge against inflation. Therefore, when inflation rises, gold prices also increase. Additionally, gold supply and demand as well as global political and economic uncertainties also affect gold prices.

Analyzing statistics from January 2000 to January 2025 through regression analysis using the Dollar Index, U.S. 10-year Treasury yields, and the Consumer Price Index, it was found that when the Dollar Index falls by 1%, gold prices rise by 1.33%. When Treasury yields fall by 1%, gold prices increase by 0.09%, and when the Consumer Price Index rises by 1%, gold prices increase by 3.34%.

Although the Dollar Index has recently risen slightly, it is likely a temporary rebound within a long-term downward trend. First, the share of the U.S. in global Gross Domestic Product (GDP) is decreasing and is expected to decline further. According to the International Monetary Fund (IMF), the U.S. share of world GDP fell from 31.2% in 2001 to 26.5% in 2024. A shrinking U.S. share in the global economy implies a decline in the value of the dollar.

Next, the reduction of dollar holdings by central banks worldwide is contributing to the decline of the Dollar Index. According to the IMF, the dollar's share of global central bank foreign exchange reserves was 71.5% in 2001 but dropped to 57.4% by the third quarter of last year. Notably, the People's Bank of China has been selling U.S. Treasury bonds and purchasing gold. Furthermore, the widening of the U.S. domestic and external imbalances is also a factor in the dollar's decline. The U.S. federal government debt, which was 54.9% of GDP in 2000, increased to 120.7% by the third quarter of 2024. The U.S. net external debt (external debt minus external assets) also surged from 15.0% to 80.3% of GDP during the same period.

President Donald Trump's imposition of tariffs on imported goods has also heightened inflation expectations. As a campaign promise, President Trump proposed a 20% tariff on imports from major countries, with an additional 60% tariff specifically on Chinese goods. According to an analysis by the Congressional Budget Office (CBO) in December last year, if tariffs were imposed on all imports as proposed by President Trump, the inflation rate would increase by 1 percentage point by 2026. From 2000 to 2024, the average monthly U.S. consumer price inflation rate was 2.6%, while gold prices rose by 10.1%. Gold is the most reliable means of hedging against inflation.

Looking at the factors determining gold prices, especially the Dollar Index, the probability of gold prices rising in the long term is high. Assuming, in an extreme scenario, that the U.S. returns to the gold standard, considering the U.S. base money supply ($5.6041 trillion) and gold reserves (8,133.5 tons) as of last December, the appropriate gold price would be $21,431 per ounce. Of course, it is unlikely that gold prices will reach this level in the near future. Compared to recent factors determining gold prices, gold is temporarily overvalued and may undergo a correction. Gold is a "hen that does not lay eggs," meaning it does not generate interest or dividends. However, gold prices have risen in the long term and are likely to continue to do so. Some portion of our assets should be held in gold.

Kim Young-ik, Adjunct Professor, Graduate School of Economics, Sogang University