Inflation's Second-Wave Fears And Budget Deficits Support Gold's Record Pace

After a stellar 2024 and an outstanding first month of 2025, the world has again caught the gold bug. Geopolitical tensions, escalating tariff threats and fears of reappearing inflation have prompted demand for physical metal, causing disruptions, delays and sale suspensions.

South Korea is the latest country to face such a challenge. According to Bloomberg, the Korea Minting and Security Printing Corp, a state-owned coin issuer, has suspended sales.

Earlier this month, London's Gold Forward Offered Rate (GOFO) surged to 10% annually, far above the typical 2-3%. A supply shortage caused the Bank of England to announce multi-week delivery delays, prompting its gold to trade at a discount of over $5 per ounce compared to London’s spot price.

However, as institutions rush to move gold overseas, the logistical challenge of converting London’s 400-ounce bars into smaller, Comex-approved counterparts has added to delays. Leasing rates have also spiked to 4.7%, with central banks capitalizing on the demand by lending gold at higher premiums.

In 2024, these financial institutions added 1,045 tons of gold to their reserves per World Gold Council. Barrick Gold's CEO Mark Bristow noted that "gold is becoming reserve currency for central banks" during the leading gold miner's Q4 earnings webcast.

Beyond short-term supply constraints, fears of a second wave of inflation add to gold's appeal. Today's 3% CPI came in hotter than expected, marking the fourth consecutive increase in annual inflation.

While another wave of global inflation is not inevitable, analysts at ING Research believe that inflation will be structurally higher and more volatile within the next years. However, they acknowledge that the past is not a perfect gauge for the future, given the vastly different environment preceding the inflation period, with two recessions and oil shocks.

Still, the domestic economy structure also looked vastly different back then. Through the 1970s, the government ran an average yearly budget deficit of 2.7%. In 2024, the deficit was 6.4%, while the Congressional Budget Office saw it at 6.5% in 2025. To plug this hole, the government needs to sell bonds and if the Federal Reserve is the buyer, directly or through programs like Quantitative Easing, the money supply grows, usually taking inflation along.

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