Beware the scorching gold rally

This year the bulls are winning so comfortably that the argument would seem to be over. After the gold price hit $4,380 an ounce, a record, on October 20th, it fell by more than 10%—only to recover some of its losses. It is now 55% higher than in January and 47% past its previous inflation-adjusted peak, reached in 1980. Many analysts predict it will break $5,000 by the end of 2026. Then again, early this year, none had anticipated it would cross $4,000 in 2025. Do theories explaining its soaring price make sense?

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Each rests on a different buyer: institutional investors, central banks and speculators. Begin with the institutions. Gold’s main attraction is as a store of value, especially in times of crises. It is tangible, easy to transport and comes in standard-sized bars tradable on a global market, which reassures investors with big portfolios. Gold’s previous bull runs occurred after the dotcom crash and the global financial crisis of 2007-09, and during the covid-19 pandemic. This time, however, a different dynamic is at play. The gold price has roughly doubled since March 2024, despite the lack of a recession. America’s S&P 500 index has risen by more than 30% over the period; real interest rates remain high.

Perhaps institutional investors are seeking refuge in gold since they fear a crisis is near. This year President Donald Trump’s tariffs and his stand-off with China have threatened trade chaos. Wars in Europe and the Middle East might have spiralled out of control. America has experienced its longest-ever government shutdown. Fears are mounting that an AI-stock crash could bring down the real economy. But it is tricky to reconcile these on-again, off-again shocks with the almost linear climb of the gold price. The metal was already hot early this year, when warnings of an AI bubble were less audible. Mr Trump’s trade deals, his truce with China, peace in the Middle East—none has had much impact on its price. After America’s shutdown came to an end on November 12th, stockmarkets rose then slumped, but that was because the odds of an interest-rate cut by the Federal Reserve fell as well. Gold’s rebound accelerated.

A second explanation contends that the gold rush is being driven by central banks—seeking protection not against short-term meltdowns but longer-run changes. According to this “debasement" theory, America’s political dysfunction and ballooning public debt, as well as threats to the independence of the Fed, are feeding fears of rampant inflation and killing faith in the greenback, causing central banks worldwide to swap long-duration, dollar assets for safe-as-houses gold. The problem with this story is that it lacks evidence. Were American securities being dumped en masse, the dollar would be falling and long-term yields would be rising. In reality, the dollar has been pretty stable after slumping earlier this year; yields on 30-year Treasuries have been mostly flat.

Proponents of debasement point out that emerging-market central banks are keen on the metal. If gold’s share in central-bank reserves is up, however, that is largely because its price is rising while the dollar is not. In volume terms, emerging-market purchases of gold, which started from a tiny base, remain small. A confidant of central-bank officials detects no urge to bet the farm on gold, especially if doing so would mean chasing a bubble: “Most are going to hold the position for many years. They would fear having to book losses for ever." IMF data suggest that their reported buying has slowed, not accelerated, since last year, and purchases are driven by just a handful of banks.

Which leaves speculators as the most likely drivers of recent price movements. On September 23rd—the last time America’s Commodity Futures Trading Commission released data, owing to the shutdown—“long" positions held by hedge funds on gold futures were at a record 200,000 contracts, equivalent to 619 tonnes of metal. Net purchasing by exchange-traded funds was also strong. Last month ETF flows ebbed; that, together with just 100 tonnes’ worth of net sales by hedge funds, would explain much of the price dip observed late that month, estimates Michael Haigh of Société Générale, a bank. ETF flows have since rebounded (hedge-fund data remains unavailable). It would, therefore, appear that the gold price closely tracks these flighty funds’ appetite.

What may have started, months ago, as a limited push for more gold in central banks’ reserves thus seems to have snowballed into a self-propelled mass of hot money chasing prices higher. That is a bad omen for “strong hands". At some point, this classic “momentum trade"—of investors following trends—will stop. The longer it lasts, the more chips the brashest players stand to lose at the end.