Gold as a hedge against government debt

The standard way to explain gold is through interest rates: when rates rise, gold struggles. This year that explanation has been leaving something out. The World Gold Council’s September market commentary, titled “Go with the flow”, suggests that a different force may be supporting gold — worry about government debt itself.

What the WGC found

The evidence is in the UK. Gold ETFs listed there added 54 tonnes in the third quarter, with inflows in 12 of the quarter’s 13 weeks, according to the WGC. That persistence is what stands out: not one burst of buying on a headline, but steady accumulation week after week. The WGC suggests rising term premia on UK government bonds (gilts) may now be influencing those flows, and that fiscal concerns could be playing a role — that fiscal and term-premium risks, not just policy rates, may be supporting gold demand.

It is worth reading that as the WGC does: as a hypothesis, not a finding. The council notes that the relationship has only emerged since July, that the sample is short, and that historically the links between UK gold flows and macro variables have been weak and inconsistent.

What the term premium is

When you lend to a government for ten or thirty years instead of three months, you take on more risk: inflation might pick up, the government might borrow far more, or rates might rise and leave you holding a bond worth less. The term premium is the extra yield investors demand to carry that risk. It cannot be observed directly and is estimated from models, but when it rises, it is a sign that bond investors are growing less comfortable lending long-term to that government.

The UK’s warning signs

A rising term premium is the bond market’s way of pricing doubt about the public finances. For a UK investor, gold offers something gilts do not: it is not anyone’s liability, so it cannot be inflated away by the issuer or hit by a fiscal crisis in the way a government bond can. The WGC’s data is at least consistent with some British investors drawing that conclusion and acting on it — UK funds had their strongest quarter on record and have overtaken China as the largest source of gold ETF inflows this year, as we report in Investors are buying the gold dip in record numbers.

How this differs from 2022

The UK has been here before, briefly. In September 2022 an unfunded budget triggered a sharp sell-off in gilts, forcing pension funds using leveraged liability-driven strategies to sell assets, and the Bank of England stepped in with emergency bond purchases. That was an acute crisis that lasted weeks. What the WGC describes now is slower and more persistent: not a market breaking, but investors steadily demanding more to hold long-dated government debt and moving some money into gold instead.

What it means for US and euro investors

The argument is not specific to the UK. US Treasury yields are near their highest since 2002 (see Yields at a 24-year high), and large deficits are a feature of most major economies. If the WGC’s hypothesis holds up, it would help explain why gold has held up even as the Fed keeps raising rates: some of the same worries that push bond yields up are also pushing investors toward gold. That is an explanation for demand, not a forecast and not advice — but it is a useful lens for reading the data. Our guide to what moves the gold price covers the other forces it competes with.

Every figure here is as reported by the publications listed under Sources, at the time they reported it. Prices move; the live gold price has the current one. Nothing on this page is investment advice.