Category: Economics: Ch 02

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Gold: why the world’s oldest safe haven is back in the spotlight

The gold market has become one of the most talked-about commodity markets in 2025, with prices reaching record highs. This is largely due to increased demand from investors, who see gold as a ‘safe haven’ during times of economic and political uncertainty. Central banks are also buying more gold as a way to reduce their reliance on currencies like the US dollar. With many analysts predicting prices could reach over $4000 per ounce in the next year, the gold market is showcasing how supply and demand, confidence, and global events can all influence a commodity market.

The commodities market is where basic agricultural products, raw materials and metals, such as gold, are bought and sold, often in large quantities and across global exchanges. Commodities are typically traded either in their physical form (like gold bars) at current market prices (spot prices) or through financial contracts, where investors buy or sell in futures markets. These are where a price is agreed today to buy or sell on a specific future date.

As with other commodities, the price of gold is determined by supply and demand. Demand for gold typically rises during times of economic uncertainty as investors want a safer store of value. This results in an increase in its price. Supply and demand, and hence price, also respond to other factors, including interest rates, currency movements, economic growth and growth prospects, and geopolitical events.

Record high prices

This year, the gold market has seen a remarkable rally, with the price of gold hitting a record high. Demand for the precious metal has resulted in spot prices surging over 35% to date (see the chart: click here for a PowerPoint). Rising prices earlier this year have been attributed to the US President, Donald Trump, announcing wide-ranging tariffs which have upset global trade. On 2 September, the spot gold price hit $3508.50 per ounce, continuing its upwards trend.

The price has also been lifted by expectations that the Federal Reserve (the US central bank) will cut its key interest rate, making gold an even more attractive prospect for investors. If the Federal Reserve cuts interest rates, the price of gold usually increases. This is because gold does not pay any interest or yield, so when interest rates are high, investors can earn better returns from alternatives, such as savings accounts or bonds. However, when interest rates fall, those returns become less attractive, making gold relatively more appealing.

Lower interest rates also tend to weaken the US dollar, which makes gold cheaper for foreign buyers, increasing global demand. Since gold is priced in dollars, a weaker dollar usually leads to higher gold prices.

Additionally, interest rate cuts are often a response to economic problems or uncertainty. As gold is viewed as a safer asset for investors during times of economic uncertainty, investors will typically increase their demand.

Unlike the market for currencies or shares, gold doesn’t rely on the performance of a government or company. This makes it attractive when people are worried about things like inflation, recession, war or stock market crashes. Gold is thus seen as a ‘safe haven’.

Gold and the Federal Reserve

The rise in the price of gold by more than a third this year can be linked to the US election last year, according to the director of research at BullionVault (see the BBC article below). Attitudes of the Trump administration towards the Federal Reserve have created concerns among investors. Fears that the US administration could erode the independence of the world’s most important central bank have fuelled the latest flows into the metal, which is traditionally viewed as a hedge against inflation.

According to the BBC article, Derren Nathan from Hargreaves Lansdown claims that it is Trump’s ‘attempts to undermine the independence of the Federal Reserve Bank’ that were ‘driving renewed interest in safe haven assets, including gold’. Investors are concerned that a politicised Fed would be more inclined to cut interest rates than would otherwise be the case, sending long-term inflation expectations higher.

This could lead to fears that future interest rates would then be pushed higher. This would increase the yields on longer-term government bonds by pushing down their price, as investors demand higher compensation for the increased risk of higher future interest rates reducing the value of their fixed-rate investments. This would force the US Treasury to pay higher interest on new bonds, making it more expensive to service US government debt.

Expected price rises for 2026

As we saw above, it is predicted that the price of gold will rise to $4000 per ounce next year. However, if the market sees investors move away from dollar assets, such as US Treasuries, the price increases would be even higher. Daan Struyven, co-head of global commodities research at Goldman Sachs explains ‘If 1 per cent of the privately owned US Treasury market were to flow to gold, the gold price would rise to nearly $5000 per troy ounce’ (see Financial Times article below).

If the Federal Reserve does come under political pressure, it could affect the stability of the US economy and beyond. When gold prices rise sharply, demand usually falls in countries like China and India, which are the world’s largest buyers of gold jewellery. However, in 2025, this trend has changed. Instead of reducing their gold purchases, people in these countries have started buying investment gold, such as bars and coins, showing a shift in consumer behaviour from jewellery to investment assets.

At the same time, global events are also influencing the gold market. Suki Cooper, a metals analyst at Standard Chartered, said that events like Russia’s invasion of Ukraine have added to political uncertainty, which tends to increase demand for gold as a safe-haven asset. She also highlighted how changes in international trade policies have disrupted supply chains and contributed to higher inflation, both of which have made gold more attractive to investors. Additionally, a weaker US dollar earlier in the year made gold cheaper for buyers using other currencies, which boosted global demand even further.

Conclusion

Although the gold market is expected to remain strong over the next six months, some uncertainty remains. Many analysts predict that gold prices will stay high or even increase further, especially if interest rates in the US are cut as expected. Continued global instability, is also likely to keep demand for gold as a safe haven high. At the same time, if inflation stays elevated or trade disruptions continue, more investors may turn to gold to protect their wealth.

However, if economic conditions stabilise or interest rates rise again, gold demand could fall slightly, leading to a potential dip in prices. Overall, the outlook for gold remains positive, but sensitive to changes in global economic and political events.

Articles

Data

Questions

  1. What factors influence the price of a commodity such as gold on the global market?
  2. Use a demand and supply diagram to illustrate what has been happening to the gold price in recent months.
  3. Find out what has been happening to silver prices. Are the explanations for the price changes the same as for gold?
  4. Why might investors choose to buy gold during times of economic or political uncertainty?
  5. How will changes in interest rates affect both the demand for and the price of gold?
  6. What are the possible consequences of rising gold prices for countries like India and China, where there is a traditionally high demand for gold jewellery?
  7. How do global events impact commodity markets? Use gold as an example in your answer.
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Rising global uncertainty and its effects

In a blog in October 2024, we looked at global uncertainty and how it can be captured in a World Uncertainty Index. The blog stated that ‘We continue to live through incredibly turbulent times. In the past decade or so we have experienced a global financial crisis, a global health emergency, seen the UK’s departure from the European Union, and witnessed increasing levels of geopolitical tension and conflict’.

Since then, Donald Trump has been elected for a second term and has introduced sweeping tariffs. What is more, the tariffs announced on so-called ‘Liberation Day‘ have not remained fixed, but have fluctuated with negotiations and threatened retaliation. The resulting uncertainty makes it very hard for businesses to plan and many have been unwilling to commit to investment decisions. The uncertainty has been compounded by geopolitical events, such as the continuing war in Ukraine, the war in Gaza and the June 13 Israeli attack on Iran.

The World Uncertainty Index (WUI) tracks uncertainty around the world by applying a form of text mining known as ‘term frequency’ to the country reports produced by the Economist Intelligence Unit (EIU). The words searched for are ‘uncertain’, ‘uncertainty’ and ‘uncertainties’ and the number of times they occur as percentage of the total words is recorded. To produce the WUI this figure is then multiplied by 1m. A higher WUI number indicates a greater level of uncertainty.

The monthly global average WUI is shown in Chart 1 (click here for a PowerPoint). It is based on 71 countries. Since 2008 the WUI has averaged a little over 23 000: i.e. 2.3 per cent of the text in EIU reports contains the word ‘uncertainty’ or a close variant. In May 2025, it was almost 79 000 – the highest since the index was first complied in 2008. The previous highest was in March 2020, at the start of the COVID-19 outbreak, when the index rose to just over 56 000.

The second chart shows the World Trade Uncertainty Index (WTUI), published on the same site as the WUI (click here for a PowerPoint). The method adopted in its construction therefore mirrors that for the WUI but counts the number of times in EIU country reports ‘uncertainty’ is mentioned within proximity to a word related to trade, such as ‘protectionism’, ‘NAFTA’, ‘tariff’, ‘trade’, ‘UNCTAD’ or ‘WTO.’

The chart shows that in May 2025, the WTUI had risen to just over 23 000 – the second highest since December 2019, when President Trump imposed a new round of tariffs on Chinese imports and announced that he would restore steel tariffs on Brazil and Argentina. Since 2008, the WTUI has averaged just 2228.

It remains to be seen whether more stability in trade relations and geopolitics will allow WUI and WUTI to decline once more, or whether greater instability will simply lead to greater uncertainty, with damaging consequences for investment and also for consumption and employment.

Articles

Uncertainty Indices

Questions

  1. Explain what is meant by ‘text mining’. What are its strengths and weaknesses in assessing business, consumer and trade uncertainty?
  2. Explain how the UK Monthly EPU Index is derived.
  3. Why has uncertainty increased so dramatically since the start of 2025?
  4. Compare indices based on text mining with confidence indices.
  5. Plot consumer and business/industry confidence indicators for the past 24 months, using EC data. Do they correspond with the WUI?
  6. How may uncertainty affect consumers’ decisions?
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Minimum pricing for alcohol

The debate about a minimum price for alcohol continues to be prompted by concerns over high levels of drinking, its effect on public health and public order, and a widespread belief that most of the alcohol that contributes to drunken behaviour is irresponsibly priced and sold. Minimum pricing for alcohol, although considered a radical intervention, is not a new policy. A minimum unit price (MUP) for alcohol was introduced in Scotland in 2018, in Wales in 2020, in the Republic of Ireland in 2022 and looks likely to be introduced in Northern Ireland.

Despite more countries following Scotland’s lead, there are no current plans to consider an application of an MUP in England. However, with recent increases in the MUP in Scotland and the findings of a five-year review in Wales, it would suggest that this policy will continue to be at the forefront of discussions of how to tackle impacts of alcohol consumption.

Reasons and options for intervention

The main goal of introducing a minimum unit price for alcohol is to tackle unwanted consequences from the consumption of alcohol. While many people consume alcoholic drinks safely without any problems, some patterns of alcohol use are associated with significant physical, mental and social harm.

It costs UK society more than £27 billion a year through a combination of health, crime, workplace and social welfare costs. Therefore, some governments in the British Isles have deemed it necessary to intervene in this market to reduce alcohol-related harm and protect the health of those regularly drinking more than the recommended 14 units per week.

Research has shown that making alcohol less affordable can reduce consumption and hence related harms. The World Health Organization considers minimum pricing one of its ‘best buys’ for tackling harmful alcohol use.

There are three main policy options that aim to reduce the consumption of alcohol by making alcohol less affordable. One is to tax alcoholic drinks; the second is to set a minimum price per unit of alcohol; the third is to ban the sale of alcohol drinks below cost price (the level of alcohol duty plus VAT).

The policy option of an MUP has been adopted by Scotland, Wales and the Republic of Ireland; England has opted to use a ban on selling alcohol below the level of alcohol duty plus VAT (since 28 May 2014).

What is a minimum price?

The introduction by the government of a minimum price for a product means that it cannot legally be sold below that price. It can be set in order to achieve certain economic or social objectives that are not currently being achieved at equilibrium in the market. In order for the policy to have an effect, the minimum price must be set above the equilibrium price. This price floor then prevents prices from falling too low and settling back at equilibrium below the MUP.

A common misconception is that introducing a minimum price for alcohol is a form of taxation. However, this is not the case. Implementing an MUP means that any extra money from higher prices goes to the retailers and producers, not to the government.

Why choose a minimum price floor?

The policy has two main objectives. The first is to protect the interests of drinkers who may make poor decisions on their own behalf. This may be from lack of information, social pressures or a disregard for their own long-term health or welfare.

The second objective is to reduce the external costs placed on health services, the police, the criminal justice system, on fellow citizens or employers. There are also longer-term external costs when alcohol abuse impacts on productivity or leads to repeated absences from work.

It is argued that MUP intervention can encourage positive changes in behaviour of both consumers and producers. It can target harmful excessive drinking, while leaving the more moderate drinker relatively unaffected.

A positive impact on consumers is the possible changes in demand. People who previously consumed cheap, and often strong, drinks, such as cheap cider, will find that their marginal private cost of consuming alcohol has increased. Depending on the price elasticity of demand, their consumption will decrease and there will be a reduction in alcohol-related violence and other external costs. A positive impact on producers is that it can encourage drinks manufacturers themselves to reduce the alcohol content of their products and, therefore, limit any increase in price passed on to the consumer.

How it differs in the different parts of the British Isles

While minimum alcohol pricing is in place in several countries, policies differ. In terms of the British Isles, in 2018 Scotland became the first country to introduce a national minimum price for all types of alcohol. Two years later, Wales followed suit. The Republic of Ireland introduced minimum pricing in January 2022, while Northern Ireland has been engaged in consultation on the policy for several years. The following table shows when MUP was introduced and at what rates.

Has the MUP been effective?

Wales has reached the five-year review point since the MUP was introduced. Many of the findings within the Welsh evaluation have strong resonance with those elsewhere, particularly those of the final Scottish evaluation. There have been five main findings:

  • Implementation has been smooth. Retailers have largely complied with the law, and enforcement has been effective.
  • Certain cheap alcohol products have disappeared. Large bottles of strong cider, for example, are now rare. There have also been shifts in promotions and product availability.
  • There are indications that overall alcohol consumption in Wales has declined. While it is difficult to measure directly, purchasing data suggests a reduction.
  • Concerns about unintended consequences have not materialised significantly. Predictions of a rise in home brewing, substance switching, shoplifting and cross-border purchasing have not been widely observed.
  • Some drinkers have changed their purchasing habits. A minority have switched from cider to wine or spirits as price differences narrowed. Others, particularly those on low incomes, experienced further struggles in financially maintaining their drinking habits.

There was also a study published last year (2024) in the journal Economic Inquiry, looking at the impacts of the policy during lockdown restrictions. The study showed that the introduction of MUP in Wales resulted in a 15% increase in transaction prices and a sharp reduction in the amount of alcohol bought, around 20%, with an overall drop in expenditure per customer compared to England over the same period.

However, it should be noted that the COVID pandemic disrupted drinking habits and the availability of alcohol. In addition, evaluating the overall effects of the policy has been complex with other economic factors, including the cost-of-living crisis, also influencing affordability.

Is it a fair policy?

A counter argument to applying a price intervention on alcohol is that it may have unintended private and external costs. One argument claims that young people could decide to switch to cheaper non-alcoholic drugs instead. Alternatively, they may seek to purchase alcohol on illegal shadow markets.

Critics of the policy argue that it negatively impacts those who consume alcohol responsibly, especially families on average or below-average incomes. The wine and spirits industry tried to lobby against the Scottish government, arguing that it is inconsistent with the operation of the free market and that the intervention creates a barrier to trade. They claim that lower sales of alcoholic drinks will cost jobs in the UK, both in manufacturing and from reduced revenues of corner shops, pubs and other retailers.

There is also an argument that relying solely on an MUP targets the affordability of drinking rather than addressing all aspects of alcohol harm. Therefore, this policy is not necessarily effective in achieving all the government’s goals. Critics argue that this policy should be one component of a more comprehensive strategy delivery, which might include education, restricting the availability of alcohol, banning advertising, increasing alcohol duty, etc.

Conclusion

Although there are currently no plans to implement an MUP in England, there is ongoing pressure for the Government to consider adopting one. In the Autumn of 2024, Lord Darzi carried out an independent investigation of the NHS in England. This investigation into the NHS highlighted the ‘alarming’ death toll in England caused by cheap drink (see link below). This led public health leaders to call for action to increase the price of cheap alcohol in supermarkets and off-licences.

However, the policy itself is not without its critics, especially those citing continued trends in actual numbers of alcohol-related deaths. Therefore, it is suggested that the policy needs to be accompanied by well-funded treatment and support services for people experiencing alcohol-related difficulties. If combined with other policy measures and social support, it has the potential to contribute significantly to reductions in alcohol-related harm.

Despite reservations, overall a minimum price per unit of alcohol is viewed by many as a justified intervention and is well supported by evidence. It has been accepted that a minimum price is required to reduce consumption closer towards the social optimum and in order to bring about change in consumer and producer behaviour. Given the evidence provided from current MUP countries and ongoing discussions of alcohol-related deaths in England, health officials believe a review is almost certain, even though the current government reportedly ruled out minimum unit pricing shortly after winning power.

Articles

Reports

Questions

  1. Using a supply and demand diagram, discuss the effect of introducing a minimum price per unit of alcohol.
  2. How is the price elasticity of demand for alcoholic drinks relevant to determining the success of minimum pricing?
  3. Compare the effects on alcohol consumption of imposing a minimum unit price of alcohol with a ban the sale of alcohol below cost price. What are the revenue implications of the two policies for the government?
  4. What negative externalities occur as a result in the over consumption of alcohol? How could a socially efficient price for alcohol be determined?
  5. Could alcohol consumption be described as a ‘de-merit good’? Explain.
  6. Rather than targeting the price of alcohol, what other policies could the government introduce to tackle over consumption of alcohol?
  7. What will determine the number of people travelling across borders within the UK (i.e. from Scotland or Wales to England) to buy cheaper alcoholic drinks?
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Why are Tesla sales plummeting?

Tesla sales have fallen dramatically recently. In Europe they were down 47.7% in January 2025 compared with January 2024. In Spain the figure was 75.4%, in France 63.4%, in Germany 59.5%, in Sweden 44.3%, in Norway 37.9%, in the UK 18.2% and in Italy 13.4%. And it was not just Europe. In Australia the figure was 33.2%, in China 15.5% and in California 11.6%. Meanwhile, Tesla’s share price has fallen from a peak of $480 on 17 December 2024 to $338 on 21 February 2025, although that compares with $192 in February 2024.

So why have Tesla sales fallen? It’s not because of a rise in price (a movement up the demand curve); indeed, Tesla cut its prices in 2024. Part of the reason is on the supply side. In several countries, stocks of Teslas are low. Some consumers who would have bought have had to wait. However, the main reason is that the demand curve has shifted to the left. So why has this happened?

A reaction to Elon Musk?

One explanation is a growing unpopularity of Elon Musk among many potential purchasers of electric vehicles (EVs). People are more likely to buy an EV if they are environmentally concerned and thus more likely to be Green voters or on the political left and centre. Elon Musk, by supporting Donald Trump and now a major player in the Trump administration, is seen as having a very different perspective. Trump’s mantra of ‘drill, baby drill’ and his announced withdrawal from the Paris agreement and the interventions of Trump, Vance and Musk in European politics have alienated many potential purchasers of new Teslas. Elon Musk has been a vocal supporter of the right-wing Alternative for Germany (AfD) party, describing the party as the ‘last spark of hope for this country’ (see BBC article linked below).

There has been outspoken criticism of Musk in the media and the Financial Times reports existing owners of Teslas, who are keen to distance themselves from Musk, ordering stickers for their cars which read ‘I bought this before Elon went crazy’. In a survey by Electrifying.com, 59% of UK potential EV buyers stated that Musk’s reputation put them off buying a Tesla.

Other reasons for a leftward shift in the demand for Teslas

But is it just the ‘Musk factor’ that has caused a fall in demand? It is useful to look at the general determinants of demand and see how each might have affected the demand for Teslas.

The price, number, quality and availability of substitutes  Tesla faces competition, not only from long-established car companies, such as Ford, VW, Volvo/Polestar, Seat/Cupra and Toyota, moving into the EV market, but also from Chinese companies, such as BYD and NIO. These are competing in all segments of the EV market and competition is constantly increasing. Some of these companies are competing strongly with Tesla in terms of price; others in terms of quality, style and imaginative features. The sheer number of competitor models has grown rapidly. For some consumers, Teslas now seem dated compared with competitors.

The price and availability of complements.  The most relevant complement here is electrical charging points. As Teslas can be charged using both Tesla and non-Tesla charging points, there is no problem of compatibility. The main issue is the general one for all EVs and that is how to achieve range conveniently. The fewer the charging points and more widely disbursed they are, the more people will be put off buying an EV, especially if they are not able to have a charging point at home. Clearly, the greater the range of a model (i.e. the distance that can be travelled on a full battery), the less the problem. Teslas have a relatively high range compared with most (but not all) other makes and so this is unlikely to account for the recent fall in demand, especially relative to other makes.

Expectations.  The current best-selling Tesla EV is the Model Y. This model is being relaunched in a very different version, as are other Tesla models. Consumers may prefer to wait until the new models become available. In the meantime, demand would be expected to fall.

Conclusions

As we have seen, there have been a number of factors adversely affecting Tesla sales. Growing competition is a major factor. Nevertheless, the increasing gap politically between Elon Musk and many EV consumers is a major factor – a factor that is likely to grow in significance if Musk’s role in the Trump administration continues to be one of hostility towards the liberal establishment and in favour of the hard right.

Articles

Questions

  1. Why have BYD EV sales risen so rapidly?
  2. If people feel strongly about a product on political or ethical grounds, how is that likely to affect their price elasticity of demand for the product?
  3. Find out how Tesla shareholders are reacting to Elon Musk’s behaviour.
  4. Find out how Tesla sales have changed among (a) Democratic voters and (b) Republican voters in the USA. How would you explain these trends?
  5. Identify some products that you would or would not buy on ethical grounds. How carefully have you researched these products?