Gold had a remarkable year last year. It rose by about 70% during 2025, then breached $5,000/oz for the first time on January 26 2026.
While the price has come off a bit, there is good reason to believe that the long-term upward trend will continue, albeit at a slower pace.
Not only are those forces that drove last year’s meteoric gold price rise still very much in play, but cryptocurrencies, once touted as “digital gold”, have proved to have feet of clay as they have once again experienced a steep price plunge.
If shaky public finances in the world’s major industrialised countries underpinned gold’s stellar performance last year, there is good reason to believe they will continue to do so in the year immediately ahead. According to the IMF, Donald Trump’s One Big Beautiful Bill Act will keep the US budget deficit at about 6% of GDP for as far as the eye can see.
In turn, that will take the US public debt-to-GDP ratio to a Greek- or Italian-like 140% by 2030. The US budget situation could be further compromised if Trump gets his way on issuing a $2,000 import tariff dividend cheque to most American households and on increasing the US defence budget by $500bn over the next two years.
If last year there was reason to worry about the US public finances, this year there is reason to also be concerned about those of Japan, which has the world’s third-largest government bond market. At a time when Japan already has a public debt-to-GDP ratio of 230% and a primary budget deficit, Sanae Takaichi, Japan’s new prime minister, is proposing to increase public spending by $135bn, or 3% of GDP.
She also wants to eliminate the consumption tax on food for two years at an additional cost of $30bn. Following her party’s landslide election victory in the election on February 8, Takaichi enjoys a supermajority in parliament that will allow her to enact her proposed stimulative measures.
Heightening the inflation risk from irresponsible budget policies in both the US and Japan are the push by both heads of state for lower interest rates at a time when inflation exceeds their central banks’ inflation target. Trump is relentlessly undermining the Federal Reserve’s independence, while Takaichi is putting pressure on the Bank of Japan not to raise interest rates to defend a very weak Japanese yen. Those actions are likely to give rise to a further weakening in both the dollar and the yen.
Additional key factors that supported gold’s rally last year were heightened geopolitical tension, increased financial market volatility and a growing loss of confidence in the US as a reliable economic partner. That loss of confidence was fuelled by Trump’s erratic and aggressive import tariff policy, his designs on Canada, Greenland and Venezuela, and his weaponisation of financial policy, as underlined by the US freeze of Iranian and Russian dollar-denominated assets. It was little wonder, then, that foreign investors appeared to begin shifting away from dollar-denominated assets for fear that they could at some stage be frozen.
There is every reason to fear that geopolitical tension will persist this year. Trump’s rupture with Europe over Greenland is likely to embolden Vladimir Putin in his Ukrainian territorial claims. Meanwhile, Trump’s bold action in Greenland, Iran and Venezuela could be an invitation to China to assert its claims over Taiwan. All this could be a trigger that causes the current AI-led stock market bubble to burst, and it could give further impetus to foreigners to sell their large US treasury bond holdings.
Yet another factor going for gold today is that there would seem to be no real alternative to it as a safe-haven asset at a time of geopolitical and financial market uncertainty. In contrast to gold’s stellar price performance, over the past year the dollar, until now the world’s dominant safe-haven asset, has lost about 10% in value. Meanwhile, any pretence that bitcoin had of being a safe-haven asset has been severely dented by its 40% plunge over the past six months.
Following last year’s sharp run-up in the gold price, it would be surprising to have a repeat performance this year. However, with all the factors now seeming to work in its favour, it would be surprising if gold did not add to last year’s gains, albeit with some ups and downs.
• Lachman, a former deputy director in the IMF’s policy development & review department and chief emerging market economic strategist at Salomon Smith Barney, is a senior fellow at the American Enterprise Institute.
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