Waiting for the gold bubble to burst
Gold offers protection against extreme scenarios. So extreme that it makes no sense to invest in gold in the same way as other asset classes. The actual value of gold only becomes apparent during a complete collapse of society, provided that people continue to believe in the ultimate value of gold. Early in such a crisis, gold is undervalued; too late, it is worthless. Gold can then be used to flee across borders, bribe officials or soldiers at checkpoints, pay for food, shelter or safe passage. The Second World War proved that people who were able to flee with physical gold had a greater chance of survival. Gold is therefore only useful in physical form. Before everyone rushes to buy aurei (the most valuable Roman gold coins), it is much more useful to buy gold in the form of jewellery than in any other form. After all, gold is also useful in more benign scenarios.
Gold adjusted before (American) inflation
New gold record
For the first time in 45 years, gold has set a new inflation-adjusted record, with prices matching 1981 levels. Both measures – nominal and inflation-adjusted – are now at record levels. Now, the 1981 peak is used to justify the claim that gold is cheap, but that is a contradiction in terms: at the peak of a bubble, the valuation is exaggeratedly high.
There is also something wrong with the rise in gold prices in recent years. Usually, gold moves inversely proportional to real interest rates: when real interest rates rise, gold usually falls. Since 2022, we have seen the opposite. While US ten-year interest rates have risen sharply, the price of gold has also shot up. This strange combination requires an explanation.
The answer lies mainly with the central banks. Since 2022, they have been buying gold on a massive scale worldwide. In 2022, no less than 1,080 tonnes were purchased – the highest level since 1950. This trend has continued, with record purchases in both 2023 and 2024. According to recent surveys by the World Gold Council, 95% of central banks expect global gold reserves to increase over the next twelve months. In 2021, that figure was only 52%. This dramatic shift reflects growing confidence in gold as a strategic reserve.
Several factors are at play. First, there is increasing geopolitical uncertainty. Second, central banks are concerned about their own independence, especially as political pressure on monetary authorities increases. Thirdly, there are growing budget deficits in developed economies. And fourthly, de-dollarisation is playing a role: countries such as China and Russia want to become less dependent on the dollar. Russia is a striking example: the country sold almost all of its US government bonds and replaced them with 274 tonnes of gold. This shift accelerated particularly after the Western sanctions against Russia in 2022. China has also significantly expanded its gold positions as part of a broader strategy to diversify its reserves.
A weaker dollar helps the gold price
A second important driver is the weakening US dollar. Since the beginning of 2025, the dollar index (DXY) has fallen by around 10%. This makes gold cheaper for investors trading in other currencies, such as the euro. The exchange rate effect is boosting demand, especially in emerging markets where gold is still seen as a safer alternative to unstable local currencies.
A relatively new development is that institutional investors are also entering the market en masse. Whereas investment funds were still cautious in 2023 and 2024, we are seeing a strong inflow in 2025. These are mainly momentum investors. Major players have adjusted their portfolios to make more room for gold, even alongside their AI stock positions. This renewed interest from large institutional players is supporting the rally. Goldman Sachs even warns that the gold price could shoot up to $5,000 per troy ounce if just one per cent of global private government bond positions were to shift to gold.
It feels like 1979
In the late 1970s, the price of gold skyrocketed amid uncontrolled inflation and declining confidence in government institutions. As was the case then, we are now seeing gold benefit from multiple factors simultaneously: ample liquidity, deteriorating geopolitics, declining confidence in central banks’ ability to combat inflation, and a weaker pound sterling. In 1979, gold was in a bubble that would eventually burst. Between 1979 and 1982, all of gold’s real price gains evaporated.
Gold offers only limited protection against inflation. Contrary to what many people think, historically, gold has only outperformed equities during periods of extreme inflation above six per cent. With moderate inflation between two and six per cent, equities actually performed better. The period when the inflation target of 2% was considered a ceiling is over. It is now much more of a floor, but 6% is a long way off.
Furthermore, gold is not a reliable safe haven. During major stock market declines since 1980, gold has yielded an average negative return of three per cent, while government bonds have risen by an average of eleven per cent. Gold, therefore, does not always offer the protection that investors expect during crises. This is an important insight for those who buy gold as insurance against stock market declines.
Gold is also subject to significant price fluctuations. Since 2010, there have been nineteen periods in which the price of gold fell by more than twenty per cent, mainly in response to a previous rise. Volatility is therefore considerable, which makes gold less suitable as a stable store of value. Investors seeking stability may hence be disappointed by the large fluctuations in the price of gold.
Finally, the copper-gold ratio points to a possible imbalance. The ratio between copper and gold often signals economic growth. Usually, both fall together with interest rates during an economic slowdown. But since 2022, we have seen a strange combination: the copper-gold ratio is falling because gold is rising relatively, and interest rates are also rising. This suggests that either interest rates are too high for the expected economic growth, or that gold has become too expensive.
Gold in your portfolio?
For investors, the question remains: Does gold belong in a diversified portfolio? On the one hand, there are clear advantages. Gold has a low correlation with equities, bonds and even bitcoin, making it attractive as a diversification tool. It offers protection against extreme scenarios, but only in physical form. More people see it as a hedge against currency risks, especially for investors who are concerned about the purchasing power of their assets in different currencies.
But there are also significant disadvantages. Gold does not generate income in the form of dividends or interest, which means that you can only benefit from price increases. It is subject to significant price fluctuations, which makes it less suitable for investors with low risk tolerance. Gold does not offer reliable protection during crises, as historical data shows. And in the long term, its returns lag behind those of equities.
Total return on gold versus the S&P500
Conclusion: after the boom comes the burst
Fundamental shifts drive the current gold market. Central banks are structurally diversifying their reserves away from the pound sterling, with gold playing an important role. The weakening pound sterling makes gold more attractive to international investors. Demand is being helped by growing institutional interest, from pension funds to ETF flows.
Much of this good news is already priced in. This environment could change if ten-year government bond yields rise materially, for example, because of rising inflation or because a higher economic growth rate also requires a higher neutral interest rate. The market is priced for perfection in a less-than-perfect world, which is excellent while the music is playing, but dangerous if you leave too late. Gold remains what it has always been: a reflection of uncertainty and a barometer of confidence in the financial system. In times of doubt, the metal shines, but once confidence returns, its lustre can quickly fade.
