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
- Gold price hits record high as investors seek safety
BBC News, Faarea Masud (2/9/25)
- Safe-haven gold rally gains further momentum after soft US data
Reuters, Sherin Elizabeth Varghese and Ashitha Shivaprasad (3/9/25)
- Gold vaults $3,000 in rush for safety from market, political worry
Reuters, Sherin Elizabeth Varghese and Anmol Choubey (14/3/25)
The foundation of gold’s rally to historic highs started back in 2022CNBC, Suki Cooper (17/3/25)
- Gold could hit nearly $5,000 if Trump undermines Fed, says Goldman Sachs
Financial Times, Emily Herbert (4/9/25)
- London’s bullion market set to trial digital gold
City AM, Maisie Grice (3/8/25)
- Gold price hits record high as investors seek safe haven
The Guardian, Julia Kollewe (2/9/25)
Data
Questions
- What factors influence the price of a commodity such as gold on the global market?
- Use a demand and supply diagram to illustrate what has been happening to the gold price in recent months.
- Find out what has been happening to silver prices. Are the explanations for the price changes the same as for gold?
- Why might investors choose to buy gold during times of economic or political uncertainty?
- How will changes in interest rates affect both the demand for and the price of gold?
- 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?
- How do global events impact commodity markets? Use gold as an example in your answer.
For those of you embarking on a course in economics, one of the first things you’ll come across is the distinction between microeconomics and macroeconomics. The news is full of both microeconomic and macroeconomic issues and you’ll quickly see how relevant both branches of economics are to analysing real-world events, problems and policies.
As we state in Economics (updated 10th edition), ‘microeconomics is concerned with the individual parts of the economy. It is concerned with the demand and supply of particular goods, services and resources such as cars, butter, clothes, haircuts, plumbers, accountants, blast furnaces, computers and oil.’ In particular, it is concerned with the buying, selling, production and employment decisions of individuals and firms. When you go shopping and make choices of what to buy you are making microeconomic decisions. When firms choose how much of particular products to produce, what techniques of production to use and how many people to employ, these choices are microeconomic ones.
Microeconomics examines people’s behaviour when they make choices. In fact many of the recent developments in microeconomics involve analysing the behaviour of individuals and firms and the factors that influence this behaviour.
Open any newspaper, turn on the TV news or access any news site and you will see various microeconomic issues covered. Why are rents soaring? How is AI affecting various businesses’ productivity? How rapidly is the switch taking place to green energy? How do supermarkets influence spending patterns? Why are wages so low in the social care sector? Why are private PCR tests so expensive for holidaymakers retuning from abroad?
Many of the blogs on this news site will examine microeconomic issues. We hope that they provide useful case studies for your course.
Articles
Questions
- Look through news sites and identify five current microeconomic issues. What makes them ‘micro’ issues?
- If world oil and gas prices rise, why is this a microeconomic issue?
- What do you understand by ‘scarcity’? How is microeconomics related to scarcity?
- Are all goods scarce?
- What is meant by ‘opportunity cost’? Give some examples of how opportunity cost has affected recent decisions you have made.
The economic climate remains uncertain and, as we enter 2017, we look towards a new President in the USA, challenging negotiations in the EU and continuing troubles for High Street stores. One such example is Next, a High Street retailer that has recently seen a significant fall in share price.
Prices of clothing and footwear increased in December for the first time in two years, according to the British Retail Consortium, and Next is just one company that will suffer from these pressures. This retail chain is well established, with over 500 stores in the UK and Eire. It has embraced the internet, launching its online shopping in 1999 and it trades with customers in over 70 countries. However, despite all of the positive actions, Next has seen its share price fall by nearly 12% and is forecasting profits in 2017 to be hit, with a lack of growth in earnings reducing consumer spending and thus hitting sales.
The sales trends for Next are reminiscent of many other stores, with in-store sales falling and online sales rising. In the days leading up to Christmas, in-store sales fell by 3.5%, while online sales increased by over 5%. However, this is not the only trend that this latest data suggests. It also indicates that consumer spending on clothing and footwear is falling, with consumers instead spending more money on technology and other forms of entertainment. Kirsty McGregor from Drapers magazine said:
“I think what we’re seeing there is an underlying move away from spending so much money on clothing and footwear. People seem to be spending more money on going out and on technology, things like that.”
Furthermore, with price inflation expected to rise in 2017, and possibly above wage inflation, spending power is likely to be hit and it is spending on those more luxury items that will be cut. With Next’s share price falling, the retail sector overall was also hit, with other companies seeing their share prices fall as well, although some, such as B&M, bucked the trend. However, the problems facing Next are similar to those facing other stores.
But for Next there is more bad news. It appears that the retail chain has simply been underperforming for some time. We have seen other stores facing similar issues, such as BHS and Marks & Spencer. Neil Wilson from ETX Capital said:
“The simple problem is that Next is underperforming the market … UK retail sales have held up in the months following the Brexit vote but Next has suffered. It’s been suffering for a while and needs a turnaround plan … The brand is struggling for relevancy, and risks going the way of Marks & Spencer on the clothing front, appealing to an ever-narrower customer base.”
Brand identity and targeting customers are becoming ever more important in a highly competitive High Street that is facing growing competition from online traders. Next is not the first company to suffer from this and will certainly not be the last as we enter what many see as one of the most economically uncertain years since the financial crisis.
Next’s gloomy 2017 forecast drags down fashion retail shares The Guardian, Sarah Butler and Julia Kollewe (4/1/17)
Next shares plummet after ‘difficult’ Christmas trading The Telegraph, Sam Dean (4/1/17)
Next warns 2017 profits could fall up to 14% as costs grow Sky News, James Sillars (4/1/17)
Next warns on outlook as sales fall BBC News (4/1/17)
Next chills clothing sector with cut to profit forecast Reuters, James Davey (4/1/17)
Next shares drop after warning of difficult winter Financial Times, Mark Vandevelde (22/10/15)
Questions
- With Next’s warning of a difficult winter, its share price fell. Using a diagram, explain why this happened.
- Why have shares in other retail companies also been affected following Next’s report on its profit forecast for 2017?
- Which factors have adversely affected Next’s performance over the past year? Are they the same as the factors that have affected Marks & Spencer?
- Next has seen a fall in profits. What is likely to have caused this?
- How competitive is the UK High Street? What type of market structure would you say that it fits into?
- With rising inflation expected, what will this mean for consumer spending? How might this affect economic growth?
- One of the factors affecting Next is higher import prices. Why have import prices increased and what will this mean for consumer spending and sales?
The Chinese economy was, for some time, the beacon of the world economy, posting strong growth and giving a much needed boost to demand in other countries. However, the weakening Chinese economy is now causing serious concerns around the world and not least in China itself.
China’s stock market on Monday 11th January closed down 5.3%, with the Hong Kong Index down by 2.8%. These falls suggest a continuing downward trajectory this week, following the 10% decline on Chinese markets last week. Today, further falls were caused, at least in part, by uncertainty over the direction of the Chinese currency, the yuan. Volatility in the currency is expected to continue with ongoing depreciation pressures and adding to this is continuing concerns about deflation.
The barrage of bad news on key economic indicators may well mean significant intervention by Chinese authorities to try to avoid its slowest growth in 25 years. However, there are also concerns about China’s ability to manage its economic policy, given recent events. IG’s Angus Nicholson said:
“Global markets are still in the grips of China fears, and it is uncertain whether the Chinese government can do enough to reassure global investors.”
Similar sentiments were echoed by Paul Mackel, head of emerging markets FX research at HSBC:
“Different signals about foreign exchange policy have wrong-footed market participants and we are wary in believing that an immediate calmness will soon emerge.”
Perhaps key to turning this downward trend on its head, will be the Chinese consumers. With a traditionally larger saving ratio than 
many Western economies, it may be that this ‘cushion’ will give growth a boost, through the contribution of consumer spending. As we know, aggregate demand comprises consumption, investment, government spending and net exports (AD = C + I + G + X – M). Consumer spending (C) increased from 50.2% in 2014 to 58.4% in 2015, according to HIS Global Insight. A similar increase for 2016 would certainly be welcome.
As oil prices continue to fall and concerns remain over China’s weak economic data, we may well soon begin to see just how interdependent the world has become. Many economists suggest that we are now closer to the start of the next recession than we are to the end of the last one and this latest turmoil on Chinese stock markets may do little to allay the fears that the world economy may once again be heading for a crash. The following articles consider the Chinese turmoil.
Free lunch: China’s weakest link Financial Times, Martin Sandbu (11/01/16)
China’s stocks start the week with sharp losses BBC News (11/01/16)
China shares fall 5% to hit-three-month low The Guardian (11/01/16)
China’s resilient shoppers face fresh test from market headwinds Bloomberg (11/01/16)
China shares head lower again on price data Sky News (11/01/16)
U.S., European shares slip as China, oil woes continue Reuters, Lewis Krauskopf (11/01/16)
U.S. stocks drop as oil tumbles again Wall Street Journal (11/01/16)
China escalates emergency stock market intervention The Telegraph, Mehreen Kahn (05/01/16)
Questions
- How are prices and values determined on the stock market?
- Share prices in China have been falling significantly since the start of 2016. Has it been caused by demand or supply-side factors? Use a demand and supply diagram to illustrate this.
- Why has the volatility of the Chinese currency added further downward pressure to Chinese stock markets?
- With the expected increase in consumer spending in China, how will this affect AD? Use a diagram to explain your answer and using this, outline what we might expect to happen to economic growth and unemployment in China.
- Why are there serious concerns about the weak level of inflation in China? Surely low prices are good for exports.
- Should the world economy be concerned if China’s economy does continue to slow?
- To what extent are oil prices an important factor in determining the future trajectory of the world economy?
The rate of inflation in the UK is measured using the Consumer Prices Index (CPI). This is made up of a basket of goods and the ONS updates this ‘basket’ each year to ensure it is representative of what the average UK household buys. The basket contains 703 items, with 110,000 individual prices collected each month.
In past years, items such as lip gloss have been added to the basket of goods, together with tablet computers and teenage fiction. In the recent update by the ONS, e-cigarettes have been added, together with specialist ‘craft’ beers and music streaming. On the other hand, other items have been removed, as the world changes. For example, during the recession, champagne was removed as an item that the representative household was no longer buying. In other cases, items are removed as they become outdated or obsolete with technology changing. This is the case with satellite navigation systems. As people turn to using their smartphones to navigate their way from A to B, satellite navigation systems are no longer seen as an item bought by the representative household.
The UK inflation rate is at an all-time low of 0.3% and there have been concerns that it may become negative, meaning we enter the world of deflation. However, if this does occur, many suggest that it is not bad deflation, as it is being driven by the extremely low oil prices. No matter what the inflation rate, the ONS will always continue to update the basket of goods that calculates inflation. It is therefore essential that these changes are made each year, as consumer buying habits do fluctuate considerably, as income changes, technology changes and general tastes change. The following articles consider what’s in and what’s out.
From craft beer to e-cigarettes, inflation basket reflects Britain’s changing shopping habits The Guardian, Katie Allen (17/3/15)
Inflation-measuring basket of goods adds protein powder, e-cigarettes The Grocer, Andrew Don (17/3/15)
E-cigareets and craft beers in updated inflation basket BBC News (17/3/15)
E-cigs added to inflation basket Mail Online (17/3/15)
Craft beer, e-cigarettes and protein shakes dded to price basket used to calculate inflation Independent, Hazel Sheffield (17/3/15)
U.K. hipsters and gym junkies win approval in new price basket Bloomberg, Tom Beardsworth (17/3/15)
Spotify in and sat navs out: take a look at the new inflation basket The Telegraph, Szu Ping Chan (17/3/15)
E-cigarettes, craft beer and Spotify enter UK inflation basket Reuters, Toby Melville (17/3/15)
Craft beer and e-cigarettes added to CPI basket Financial Times (17/3/15)
Questions
- What is the difference between the CPI and RPI? Which is usually higher? Explain your answer.
- Explain why champagne was removed from the basket of goods during the recession. What is sensible?
- How is the CPI calculated and hence how is inflation measured?
- Why has there been a movement towards chilled pizzas and away from frozen pizzas? Is the change likely to affect their relative price? Use a diagram to support your answer.
- What impact has technological progress had on the basket of goods that the representative household purchases? Do you think that technological progress make it more or less important for the basket of goods to be reviewed annually?
- Do you think products such as the iPad and e-cigarettes should be included in the CPI? Are they truly representative?
- In the BBC News article, you can access a list of the products that are ‘in and out’. Is there anything on there that you think should be in or that should be out? Be sure to justify your answer!
