February 2025
Market Commentary
Gold Bubble or Sign of the Times?
(4 min read)
12th February 2025
The price of gold has recently appreciated dramatically, breaking through its all-time high in 2024 and pushing nearly 50% higher still in 2024 to approximately $2,900 per ounce at the time of writing. The question is where the price goes from here following such a performance.
With most mainstream asset classes there are inputs to guide investors on valuation. For equities we can study price/earnings ratios, price to book, price to sales and dividend yields to name a few. For bond investors nominal and real (after inflation) yields determine the market’s attractiveness. For currencies markets assess inflation and interest rate differentials between jurisdictions.
Gold, however, rather like fine art does not produce an income stream and depends on the relative attractiveness of other asset classes and sentiment for investor demand. Nevertheless gold, over time, has always offered the potential for protection as a store of value during times of turbulence driven by economic or political factors. Fiat currencies [view glossary], such as USD or GBP, which we use as consumers and businesses in everyday activity, have had their purchasing power eroded by inflationary monetary and fiscal policies.
Chart 1
Gold Price (USD/T. oz)
X axis shows date range from 2000-2025.
Y axis shows gold price in US Dollars per Troy Ounce.
There are four key drivers that conventionally drive the gold price:
Real US interest rates, which is the return investors receive after inflation. When real interest rates are low the opportunity cost of being in a zero yielding asset such as gold evaporates and drives the gold price higher. The gold price performed strongly following the 2008 financial crisis through to 2012 as global interest rates fell sharply, particularly in real terms. There was then a lull in gold’s performance as interest rates stabilised at higher levels until the arrival of Covid when they collapsed again forcing the gold price sharply higher. The rally in the last year, c46%, is counter intuitive because it has occurred during a period of elevated interest rates.
A weak USD (US Dollar) is positive for the gold price as it holds and should protect purchasing power in USD terms. Since 2010 the USD as measured by the trade weighted index DXY (an index that measures USD versus a basket of currencies weighted to trade volumes) has been firm, reflecting the interest rate cycles described above. This should have been a headwind for the gold price. In addition, the gold price action over the last 5 years has been highly correlated with the performance of the S&P 500 which defeats the purpose as a diversifier for core asset classes.
High US inflation should be positive for gold as, again, it should maintain purchasing power in USD terms. Higher energy prices due to the conflict in Ukraine and Covid supply chains caused a sharp rise in inflation, but the data over the last 18 months has seen inflation levels fall to, albeit at slightly above, central bank targets and yet the gold price continues to rally.
General geopolitical and economic uncertainty is a tail wind for gold investors searching for a safe haven as governments devalue fiat money. Central banks, particularly from emerging markets, have been buying gold to diversify reserves as a Trump administration disrupting global trade flows with tariffs encourages them to reduce USD exposure. The lessons learnt by Russia having assets frozen may have caused those institutions to rely less on USD. See Chart 2 below illustrating the fact that central banks have been net buyers for 15 consecutive years. Private investors have followed the safe haven theme as well. Concerns over government deficits have also encouraged investors to look at gold as a safe haven relative to bonds.
Chart 2
Central Banks have been net buyers for 15 consecutive years.
Chart range: 2010 - 2024.
What does this mean for clients?
The raw fundamentals that would normally be drivers for a continued rise in the gold price (low interest rates, a weak USD, uncomfortably high inflation and volatile stock markets) currently no longer apply as drivers for investors. Rather, negative geopolitical sentiment and deglobalisation has driven the most recent demand.
What does this mean for Montgomery clients? We have always held - and will most likely continue to hold - a weighting in gold on behalf of our clients. The yellow metal cannot be printed, and it has served as the bedrock for global currencies throughout history. Over the years we have typically accessed this safe haven asset through gold mining shares, ETFs (Exchange Traded Funds) and ETCs (Exchange Traded Commodities) which hold physical bullion. Today we hold a single digit % weighting in gold in client portfolios and our investment committee are monitoring this position closely.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Glossary
www.montgomeryassociates.co.uk/glossary
Risk warning
This article and other articles on www.MontgomeryAssociates.co.uk does not constitute an offer or invitation in respect of investments described, nor should it be interpreted as advice or a recommendation. You should contact your financial adviser or accountant for advice relating to your circumstances. The opinions and information in this article have been prepared from sources believed to be reliable at the time and are given in good faith. The information and opinions expressed in this document represent our views at the time of preparation and may be subject to change. The value of an investment and any income from it can fall as well as rise and you may not get back the amount you originally invested. Past performance is not a guide to future performance.
