Uncertainty in American government policy has, in recent weeks, driven the price of gold higher. Unsurprisingly, investors are nervous about where the financial world is heading, especially in a world where competing powers have alternatives perspectives on where the balance of financial power should reside. Some, such as managers in China and Russia, want the world to move away from the west, a world led by European and American power.
There’s no certain answer on how the financial world will look in 10 years. This uncertainty is a driving force behind gold’s rise.
It’s Not Just America. Europe is Quickly Becoming the Deciding Point in a U.S. Against China/Russia Ideological Battle
The world’s most well-known safe-haven asset is not just responding to America. Recent developments in Europe suggest that the yellow metal could be poised for further gains as well. As the European Union grapples with a mix of political instability, economic sluggishness, and monetary policy uncertainty, a confluence of factors are emerging that bodes well for a higher price of gold.
1. Persistent Inflation vs. Recession Risk
One of the most pressing challenges facing Europe is the uneasy balance between inflation and growth. While headline inflation has come down from its 2022 highs, core inflation remains sticky in several key economies, including Germany and France. The European Central Bank (ECB), which has raised interest rates aggressively over the past two years, now faces mounting pressure to pivot toward rate cuts—yet doing so too early could reignite inflationary pressures.
This "stagflation-lite" environment, where inflation remains above target while growth slows, is historically favorable for gold. Investors often turn to gold as a store of value when real yields are low or negative. Should the ECB decide to cut rates prematurely in response to slowing GDP growth across the bloc, the real return on euro-denominated assets could diminish, making gold a more attractive alternative.
2. Geopolitical Spillovers and Defense Spending
Europe’s proximity to ongoing global conflicts—particularly the war in Ukraine—continues to exert a gravitational pull on its economy and policy. Despite the relative stalemate in Eastern Ukraine, the conflict has escalated into a prolonged geopolitical standoff between NATO and Russia. Increasingly, EU countries are committing to long-term military investments, leading to upward pressure on fiscal deficits.
The reallocation of spending to defense can be quite productive and produce innovative new products and a renewed culture of strength—an often forgotten trait in global economic statistics. That optimistic view, of course, isn’t the only possible outcome. It is this uncertainty, in addition to continued uncertainty about the future of U.S. support for Ukraine, that has driven the price of gold higher. Gold, as a hedge against geopolitical risk, often sees rising demand in periods of global tension—especially when those tensions are geographically proximate and fiscally destabilizing.
3. Weak Euro Outlook
The U.S. is not the only country with weakening economic conditions. European countries are also on the watchlist of economies that need a boost. With the ECB lowering its Deposit Rate, monetary authorities in Europe have signaled concern over what the coming economic picture will look like.
4. Central Bank Demand and Basel III Implications
European central banks, like many of their global counterparts, have been net buyers of gold in recent years. Countries such as Poland, Hungary, and the Czech Republic have significantly boosted their gold reserves, reflecting a growing mistrust in the long-term sustainability of sovereign debt and fiat currency systems. This trend shows no signs of reversing.
Basel III regulations, which treat physical gold more favorably in the context of banking reserve requirements, have also bolstered demand. European financial institutions increasingly view gold as a reliable Tier 1 asset, particularly in an environment where sovereign bonds may no longer be risk-free due to debt sustainability concerns in southern Europe. This regulatory tailwind adds structural support for higher gold prices over the medium term.
Summing up
The European Union stands at a crossroads, facing an uneasy mix of inflation, slow growth, and geopolitical risk. While none of these challenges alone may be sufficient to drive a sustained rally in gold, their combined effect presents a powerful argument for the metal’s appeal.
Investors seeking stability amid growing uncertainty are likely to find gold increasingly attractive as a hedge—not just against inflation, but against systemic risk in Europe’s economic and political fabric. Whether through central bank demand, safe-haven flows, or declining real yields, the road ahead appears paved with reasons to expect a higher price of gold.
