Gold and the larger economy

Gold is a rare earth metal, yet much sought after when it comes to expression of wealth. Being rare looks like a somewhat constant annual increase in global supply of 2 to 3% against a demand that increases much more rapidly. These factors along with others less reasonable ones make the price of gold a varying discussion in different sittings. This article aims to provide a general overview of these factors and highlight connections with the recent and general economic situation in Pakistan.

Gold and the US dollar:

 In 1944, the Bretton Woods Agreement tied the dollar’s value to gold which was $35 per ounce of gold back then. This was done in hopes of achieving stability in foreign exchange systems worldwide while other countries valued their currency against the dollar. However, in 1971, the US ran out of gold supply to exchange for the dollar and President Nixon had to suspend the convertibility of dollar to gold.

This transactional process creates an inverse relation between gold and the US dollar. And it continues because of two connected reasons. One is that gold is mostly denominated in dollars and then secondly it is a dominant currency in the form of which most of the world’s reserves exist.

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Hence, the story goes such that when the dollar is weak, the world (governments for their central banks, investors for their funds or profits instead of other investment options and people for jewelry or bars or coins), finds it cheap to buy gold and in turn pushes the demand and the price of gold up. And they would trade the dollar for gold because gold seems more like a safe investment or store of wealth when the dollar producing economy is weak.

Today, we see that the US is in a bit of a demanding situation as compared to the recent past. The economy is exhibiting trade deficits with competing economic rivals and maturing government debt in the background of conflicting blocks of nations. Hence, it is expected that in the short term the dollar would continue to weaken. Although, the issues at place are not straight-forward in nature, unless at least a superficial clarity is achieved on how things will be sorted out, this is the trend that would be expected. Hence, we see that from this lens gold would continue to rise sharply as it already has been in the recent days.

Gold and the changing world dynamics:

Two pieces of the world economic puzzle are worth mentioning here. One is the increasing divide of allied groups with intentional opposing political actions on the global stage. A side includes countries like that of the BRICS while the other includes US, Europe, and other allies. Although many countries refuse to take a side they are still influenced by these powerful economies and the decisions they take. The other piece of the puzzle are the changing labor dynamics of world-wide manufacturing industries. The latter becomes one of the main objects through which the two sides express and reinforce their political divide.

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This situation increases the race after global economic – dominance through an era of tech revolution. This revolution would primarily be made up of Artificial Intelligence, Robotics and decentralization in funding markets in the form of cryptocurrency and blockchain. One thing common in all these monsters is metal and electricity. And that is what is leading nations like China and the US or companies like BYD and Tesla to compete and control over upstream supply chain segments. They wish to achieve this through increased pressure for rare resource mining and refinery. It all comes down to minerals and metals like lithium, cobalt, nickel, gold, silver etc. Hence this also logically connects to a situation which favors a gold rise.

Gold, countries at war and political instability:

War and armed conflict is an important signal. First it indicates strong political instability which can influence economies worldwide. Secondly it highlights where a country’s true alliance lies. When armies fight military strategy and equipment determines where they have received significant support from. For example, in the recent Pak-India conflict the utilization of JF-17 and Pakistan being China’s top military customer highlight its dependency on China. Unlike the military example, if we look at the Pakistan Crypto Council negotiations or the everlasting IMF funding, Pakistan is not any less dependent on the US than it is on China for economic survival and growth.

The reason why it is important to highlight this political context is because now it is influencing and essentially shaping the world economy more than ever before.  The existence of such crisis creates a volatile market and the inability to take sides makes it highly vulnerable to multiple governments’ actions. Then sentiments drive price much more than can be explained. For example, in the month of April itself we saw the KSE-100 index take three extreme twists amid three phases of trump tariff announcements, then the 90-day break and then the initial phase of India-Pakistan conflict.

Connecting this to gold, we see that whatever happens to the dollar denominated gold happens twice or thrice as much to the Rupee denominated gold. This increases the already volatile nature of gold prices for Pakistani local investors. Furthermore, we see that our currency value becomes more unstable and impacts the purchasing power of the Pakistani people. And if the troubles persist alongside high inflation and economic uncertainty all this multiplies.

However, the good news is that some of these economic indicators have recently been moving in favor of Pakistan. We look at inflation and it has been declining gradually for six consecutive months coming down to 0.3% in April, 2025. Similarly, the policy rate has been brought down to 11% in the start of May, 2025. This gives a positive perception on how investors would perceive holding gold. Of course, in addition to the safe haven point of view. Also, rupee has continued to weaken against the dollar in the recent months and this creates higher capital gains for people holding gold as an asset of value.

Gold, passion for jewelry and cultural norms:

Demand which is the leading source of price fluctuation for gold mostly comes from a passion for jewelry and the need for a safe haven. No wonder we have all seen at least one such woman in our families who took use of their hoarded gold at times when their husbands had to purchase expensive property. As per Q1 figures of 2025 by World Gold Council, 36% and 27% of total gold demand came from jewelry fabrication and bullion stock respectively. Cultural norms, liquidity, rare supply in nature, all connect to this intuitive demand of storing gold. In turn, they continue to push the value of gold up consistently with the passage of time. In China and India, even recorded trends exhibit the value of gold rising during wedding seasons. For Pakistan, a similar time would be the end of each calendar year, the winter season.

Gold and related investment tools:

In the same period of WGC calculations, ETFs made 18% of gold demand globally. However, the proportions would be much smaller in a country like Pakistan. The only publicly marketed gold fund is the Meezan Gold Fund with a NAV of PKR 6.2bn (as of April 2025) which is roughly 75% gold. As is for stocks or mutual funds, this is a less opted and much volatile option. Reasons are, the volatile nature conflicts with the need of haven concept, lack of financial awareness or suitable risk profile and confusing benchmark comparisons for literate investors. Furthermore, the weaker currency of PKR results in a better return on pure gold stock than does on a gold fund investment. Hence, this area has low chances of influencing gold value in Pakistan.

⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →