The gold price has broken through the $3,900 per troy ounce mark – yet despite the rapid rally, many market observers lack clear arguments for a major correction. The yellow metal has now gained almost 50% since the beginning of the year, recording its strongest annual increase since 1979. In addition to known supporting factors such as high national debt, persistent inflation expectations, and geopolitical uncertainties, another component is now emerging: the ongoing government shutdown in Washington.
Political Standoff in Washington Supports Gold
The failure to reach a timely agreement in the US Congress on new budget appropriations has triggered a partial government shutdown – a signal of political uncertainty that traditionally benefits gold. While the immediate economic effects are manageable in the initial days, the longer the shutdown continues, the more noticeable the consequences could become. Initial estimates put the potential loss of production at approximately $7 billion per week; an assessment prepared by the Council of Economic Advisers and picked up by Politico even suggests up to $15 billion per week.
Betting platforms currently estimate the shutdown to last approximately eleven days. Nevertheless, even a quick compromise would not necessarily be sufficient to fully repair the reputational damage incurred. Against the backdrop of tariffs and trade policy tensions, the credibility of the USA is particularly under scrutiny – an environment in which gold gains additional attention as a store of value.
Flight from the US Dollar and the “Debasement Trade” Thesis
Parallel to the political risk, the discussion surrounding the medium-term purchasing power of the US dollar has intensified. Last month, a significant shift from the US dollar into gold was observed. Analysts at JPMorgan refer to the “Debasement Trade” in a recent note: private investors have begun to doubt the stability of fiat currencies and to hedge against a creeping devaluation in light of high budget deficits in leading economies.
Central banks have been pursuing this path for several years by diversifying their reserves more broadly and expanding their gold holdings. What is new is that, according to JPMorgan, this dynamic is increasingly shifting to the retail sector. This provides the rally with an additional demand component beyond futures markets and central bank purchases. For the gold price, this means that, in addition to classic crisis and inflation drivers, the aspect of trust in paper currencies is now also gaining more prominence.
ETF Data Underlines Demand for Gold
A look at the fund level supports this picture. According to analysts, the world’s largest physically backed gold ETF, SPDR Gold Shares (NYSE: GLD), recorded record inflows in September. Accordingly, GLD’s holdings increased by 35.2 tons over the month. On September 19 alone, 18.9 tons flowed into the fund – the highest daily increase since its inception.
Remarkably: Despite the exceptionally strong September, global gold ETF holdings remain below the 2020 highs. This signals that the market – despite the recent rally – still has structural room for investment. Nevertheless, the development remains dependent on external factors: the further shaping of US fiscal policy, inflation trends, and the interest rate and liquidity situation in the bond and foreign exchange markets. For gold as an asset class, the interaction of these factors remains central.
What is Crucial Now?
From a market perspective, it is crucial whether the shutdown is quickly resolved or prolonged. A brief interruption could limit the economic repercussions but still leave sentiment subdued. A prolonged shutdown carries the risk that uncertainty in the financial system will increase and risk premiums will widen – an environment in which gold often serves as a hedging instrument. In parallel, the question remains how permanent the observed shift away from the US dollar is and whether the “Debasement Trade” solidifies into a broader trend.
Technically, the jump above $3,900 per troy ounce is a strong signal, but recent volatility reminds us that gold remains sensitive to news, interest rate, and currency movements. Therefore, market participants will closely monitor not only political developments in Washington but also data on the labor market, inflation, and yields in the US bond market.
For companies along the gold value chain – from mining companies to royalties and processors – price development is a crucial reference point. The same applies to exchange-traded products such as GLD or other gold ETFs, which serve as an indicator for the capital flows of institutional and private investors. The fact that global ETF holdings are still below the 2020 level provides additional context for the current market phase: The increase in the gold price has not been driven exclusively by passive inflows so far, but reflects a broader set of demand drivers.
Conclusion: The combination of political uncertainty, growing skepticism towards fiat currencies, and measurable inflows into gold-backed products characterizes the current environment. How sustainably these factors will impact depends significantly on the duration of the US government shutdown, the future fiscal and monetary policy of the USA, and the global economic situation. Gold thus remains at the center of the macroeconomic debate – as a barometer for trust, monetary stability, and risk appetite.
