There’s a long-running theory that the Wizard of Oz is not just a children’s story, but a metaphor for America’s late-19th-century debate over the gold standard, which linked the value of the dollar to the value of gold.

The Yellow Brick Road symbolised gold, Dorothy’s silver shoes (changed to ruby slippers for the film) represented silver, the Scarecrow stood for farmers and the Tin Man represented industrial workers, all trying to find prosperity in a system constrained by a tight money supply.

The gold standard meant the number of dollars issued was connected to the size of the US gold reserves. This limited the amount of money that could circulate and, in effect, restricted access to wealth.

Fast forward to today, and gold is once again at the centre of a monetary debate, only this time the story is global.

Gold was one of the best-performing assets in 2024 and it has continued to surge this year, although the price recently slipped by around 6% in one day. After the precious metal’s stellar rise, clients are asking: what’s behind the move and what happens next?

Let’s start with the fundamentals. In 2022, when the US sanctioned Russia and froze its dollar reserves, central banks worldwide took notice. If reserves held in US government bonds could be frozen, then perhaps it was time to diversify away from dollar-denominated assets.

The result? A surge in gold buying by the central banks of countries ranging from China to Poland, as nations sought to move their reserves into assets free of political risk.

But central banks aren’t the only ones following the yellow brick road. As prices climbed, investor demand accelerated. Gold exchange-traded funds* (ETFs) have seen unprecedented inflows, and individual investors have joined the rush. A recent photo from ABC Bullion in Australia showed queues snaking around the block as people lined up to buy gold bars. Asked why, many said they didn’t want to miss out, while some even spoke about storing gold “under the mattress”. This kind of exuberance usually signals the market has peaked (at least for the short term), and sure enough, we’ve just seen a pullback.

Our chart shows how strongly the gold price has surged since the beginning of last year and also highlights the unprecedented flows into gold ETFs, which attracted $64 billion (around £48 billion) from investors in the first nine months of this year.

‍Key Takeaway

From here, we believe the medium-term outlook for gold remains positive. The precious metal’s appeal as a diversifier is undiminished. It tends to move independently of shares and bonds, and in a world of heavy government debt and geopolitical tensions, central bank demand is unlikely to fade. However, the pace of potential gains may slow as the speculative heat cools.

In other words, the road ahead for gold may not be quite as glittering as the one Dorothy followed, but we believe it’s still paved with long-term potential when the precious metal is held in a diversified portfolio alongside other assets.

‍

*An exchange-traded fund is an investment fund that holds or tracks a single asset, such as gold, or multiple assets and is traded on the stock market like an individual stock.

‍

‍Find out more about our multi-asset solution

‍

‍

This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.