Gold Rises Again on Strong Physical Demand and Lower Dollar

The global gold market has entered a new phase of ascendancy, driven by a potent mix of surging physical demand, a weakening U.S. dollar, and the geopolitical reordering of international finance. In May 2025, gold prices reached a two-week high of $3,422.60 per ounce, a 2.65% increase from April levels, as Chinese investors, central banks, and strategic institutions collectively reinforced their commitment to the yellow metal. This rally reflects not just cyclical momentum but a structural shift toward gold as a pillar of global wealth preservation and de-dollarization.

The Chinese Demand Surge
At the core of gold’s recent gains is China’s post-Labor Day buying frenzy. Retail investors, spooked by real estate market instability and fears of yuan depreciation, poured into physical gold, pushing Shanghai Gold Exchange (SGE) trading volumes to 1,850 metric tons in Q1 2025—a 30% quarterly jump. Chinese purchases now account for 40% of global gold demand, with the SGE’s strategic expansion, including a new yuan-denominated gold warehouse in Hong Kong, cementing Beijing’s ambition to rival Western pricing benchmarks.

This institutional push is mirrored in central bank behavior. China’s People’s Bank added 8% to its gold reserves in 2025, bringing holdings to 2,250 tons, while global central banks collectively purchased 800 tons in Q1—the highest quarterly tally since 2020. Gold now represents 15% of global foreign exchange reserves, up from 11% in 2020, as nations like Russia, Turkey, and Iran shift away from U.S. Treasury dependency.

The Dollar’s Retreat and Its Gold Implications
The U.S. Dollar Index (USDX) has been a key catalyst. In May, it fell 0.5% to 99.23, extending a broader decline of 7% since its 2024 peak. This weakening is partly due to the Federal Reserve’s decision to hold rates at 5.25–5.50%—despite elevated inflation—while markets price in a 45% chance of a rate cut by September. A dovish Fed weakens the dollar, making gold cheaper for non-U.S. buyers.

The inverse relationship is stark: when the USDX dipped in May, gold ETFs attracted $2.8 billion in inflows, with European investors—benefiting from a weaker euro—boosting EU gold imports by 18% year-to-date. Even Federal Reserve Chair Jerome Powell’s caution on inflation risks triggered a 1.2% intraday gold rally, underscoring the metal’s role as a hedge against both currency and policy uncertainty.

Beware the Technicals, But Trust the Fundamentals
While gold’s fundamentals are compelling, technical indicators hint at short-term vulnerability. The Relative Strength Index (RSI) hit 72 in May, signaling overbought conditions, and a break below the $3,350 support level (the 50-day moving average) could spark profit-taking. Analysts like J.P. Morgan caution of a potential $2,950 pullback by year-end, while Citi envisions a $3,800 price tag by 2026, assuming central banks and de-dollarization trends persist.

Conclusion: Gold’s New Era of Strategic Importance
Gold’s May surge is not merely a cyclical blip but a reflection of enduring structural forces. China’s dominance in physical demand, central banks’ diversification away from the dollar, and the erosion of U.S. financial hegemony are reshaping gold’s role in the global economy. With yuan-denominated gold contracts now accounting for 22% of global trading—up from 12% in 2023—and central banks holding 15% of reserves in gold, the metal is poised for sustained upward pressure.

Investors should heed the risks of overbought conditions and Fed hawkishness, but the data is clear: gold’s appeal as a hedge against monetary fragmentation, inflation, and geopolitical instability is unmatched. As the Shanghai Gold Exchange and its yuan-backed instruments gain traction, the world is witnessing the birth of a new monetary order—one where gold is not just an asset but a pillar of financial sovereignty.