Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 610

Gold $5,000?

“What motivates most gold purchasers is their belief that the ranks of the fearful will grow…. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while.”
—Warren Buffett [Letter to Shareholders, 2011]

The price of gold was on a historic ascent before the April 2, 2025 tariffs announcement. In March, gold had eclipsed a significant milestone, surpassing $3,000 an ounce for the first time ever. Even on an inflation-adjusted basis, gold achieved an all-time high.

Then the new tariffs sent equity markets plunging. Market sentiment turned decidedly bearish and the benchmark S&P 500, which had already fallen into correction territory earlier in the year, declined even further in the trading days that followed, before recovering.

Given this backdrop, is gold poised to go even higher in the months and years ahead? After all, in the flight to safety that accompanies equity market swoons, with its low correlation to stocks and reputation as an inflation hedge, gold is regarded as the quintessential safe haven asset. Indeed, unlike few other investments, gold has proven its mettle as a store of value for much of human history, with a track record of millennia rather than decades or centuries. Might that make it especially appealing in times like these?

To answer these questions, we first need to explore the traditional and non-traditional tailwinds that may be behind gold’s recent trajectory. Two potential drivers, in particular, stand out: economic uncertainty and increased atypical gold investment, particularly the process of de-dollarization.

The long- and medium-term forces impacting gold prices

Over the past 15 years, the financialization of gold, with the introduction of gold exchange-traded funds (ETFs) and gold-backed stablecoins, for example, has reshaped the gold market. While gold-based futures and derivatives have existed for some time, gold ETFs gave retail and institutional investors alike the ability to add gold to their portfolios in a simple way. Though some investors hold gold coins or even bullion, physical gold has two big risks: It can be stolen, which makes security expensive, and has an illiquid physical market. As easy as it is to buy gold at Costco, it may not be so easy to sell. Financialization removes these impediments.

Figure 1 shows the relation between the real price of gold and the amount of gold held by SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), the two top gold-owning ETFs, as measured in troy ounces, which are about 10% heavier than traditional ounces. The real gold price is the nominal price of gold divided by the CPI. This represents the price of gold in 2025 dollars.

The green line in the graph shows a significant relationship between ETF holdings and the real price of gold. Indeed, the average price of gold shifted upwards (black line) after financialization. This indicates a long-term impact on the price of gold.

The medium-term influence is the trend towards de-dollarization. While this likely began in 2022, it is highly relevant even today. De-dollarization accelerated after the Russian invasion of Ukraine in February 2022. In retaliation for the Russian attack, the United States weaponized the U.S. dollar and imposed severe economic sanctions, cutting Russia off from the SWIFT global banking system, among other measures.

China took note. Since the 1944 Bretton Woods agreement, the U.S. dollar has served as the global reserve currency. This has given the U.S. outsized influence in world trade even if, since 1971, the dollar is no longer backed by gold. If the U.S. could deploy the dollar to isolate Russia, it could do the same to China. To mitigate this risk, China needs to wean itself from the U.S. dollar.

In order to accomplish that, China had to increase its own currency’s credibility on the global stage. Buying more gold helps. China’s official holdings have risen 15%, or by 336.2 metric tons, since November 2022.

Figure 2 shows China’s gold holdings next to those of gold ETFs. As the gold holdings of ETFs have stalled or declined since their peak during the COVID-19 pandemic, China’s de-dollarization-related purchases have picked up the slack. Importantly, Figure 2 reports the ‘official’ holdings. Many believe that China has conducted significant non-official accumulation of gold as well. Indeed, it is in China’s best interest not to pre-announce a significant buying program—which would immediately increase the price of gold.

Obviously, gold is not like paper currency. Central banks cannot simply turn on the printing presses and churn out a fresh supply. Gold production is expensive and not easily ramped up in response to rising demand. In 2024, 3,330 metric tons were produced according to the World Gold Council, and the 2025 figures are not likely to be much higher (or lower). So, with few if any levers to pull on the supply side of the equation, the principal mechanism to address increased gold demand is higher prices, in other words, $3,000-plus an ounce.

While de-dollarization has been ongoing for quite a while, it has accelerated during recent tariff uncertainty. Tariffs mean less global trade. Since the dollar is the world’s reserve currency, less trade means less demand for the dollar to finance that trade. As such, countries sell U.S. bonds and invest in gold and other assets.

Gold imports

There has been a surge in gold imports over the past four months. Given the uncertainty about the final form of the tariffs, it is likely that some of the imports of gold (and other goods) are designed to get ahead of the tariffs. The Federal Reserve Bank of Atlanta, in its GDPNow forecast, suggests that the surge in gold imports accounts for 2% of GDP. Indeed, they are forecasting approximately -2% real growth in GDP, largely driven by gold imports. Importantly, gold is classified as a financial asset by the Bureau of Economic Analysis (BEA) – gold is not a ‘good’. It is unclear whether the initial GDP release will confusingly include the gold imports or exclude gold. However, the point is not the treatment of gold in GDP calculations but the magnitude of the imports. Some of the imports represent the movement of gold from offshore vaults. The other part of the imports is likely due to fresh demand. Again, given the limited supply of gold, extra demand immediately impacts prices.

The Golden Constant and The Golden Dilemma

So, given these forces and their role in gold’s current elevated price, how safe is gold as a safe haven asset? That’s the critical question in navigating current markets and requires an examination of history.

An important point to remember: Gold’s reputation does not always align with reality. The notion of gold as an inflation hedge, for example, may not be as ironclad as some believe. With his concept of the “Golden Constant,” Roy W. Jastram (1978) sought to demonstrate that gold’s purchasing power, its “operational wealth,” as he put it, was more or less unchanging over time, in a sense, immune to inflation. Whatever a particular amount of gold could buy 2,000 years ago was about as much as the same amount could buy today.

I revisited Jastram’s work in “The Golden Dilemma” (2013) with Claude B. Erb. We validated Jastram’s thesis that the real price of gold was approximately constant over millennia. We calculated how much Roman centurions were paid in gold 2,000 years ago. Their wage in gold, when converted into dollars, closely matched that of a U.S. Army captain today.

However, investors don’t have horizons of millennia or even centuries. Erb and I show that over shorter horizons gold is a highly unreliable inflation hedge. The reason is simple: Gold is volatile and has about as much return volatility as the S&P 500. Inflation rates are not so volatile; inflation’s volatility is less than 2% on an annualized basis.

The difference in the volatility of gold and inflation is starkly represented in Figure 3, which compares 10-year gold returns with the 10-year inflation rate. The sample starts in 1975, when U.S. investors were once again permitted to own and trade gold following the enactment of Public Law 93-373.1 The blue line represents the inflation rate, the CPI, which the real and nominal prices of gold should have tracked—assuming gold is a perfect inflation hedge. But, in fact, gold prices indicate little if any correlation to the 10-year inflation rate.

In the recent 20-year period, gold generally outperformed inflation and was thus a good hedge. But in the 20 years before, gold underperformed inflation and so was a poor hedge. This is exactly what we would expect when an asset with 15% volatility is used to hedge an asset with less than 2% volatility. It is an unreliable hedge.

So, if the new tariffs usher in a period of resurgent inflation, gold may not be an effective antidote.

Bear markets: Has the golden hedge held?

But what about the price of gold in market drawdowns? If gold is not always and everywhere an inflation hedge, might it still offer a reliable safe haven in market downturns?

To find out, we consider gold’s performance in the 11 major stock market drawdowns.2 For comparison, we also include two additional hedging candidates: Treasury bonds and S&P 500 puts taken 5% out of the money. Figure 4 shows that the price of gold went up in eight of the 11 S&P 500 drawdowns. In the remaining three, the price fell but the drop was far smaller than the S&P 500’s. Thus, gold provided some diversification benefit and could indeed be a valuable hedge against stock market volatility in the current environment.

Figure 5 shows a similar pattern during recessions. In three of the four recessions when the S&P 500 declined, the gold return was positive. In the 1990–1991 recession, when the S&P 500 rose, gold registered a small decline, which is consistent with its low or negative correlation to stocks.

Hedging performance must always be weighed against the cost of hedging. As Figure 4 and Figure 5 show, long puts work. But they work for a reason—they are very costly to implement.

High real gold prices: What comes after?

Currently, gold prices are at or near all-time highs. If gold prices revert towards the mean, they may not offer much in the way of protection. Looking back, gold’s performance in the years following price peaks has tended to be low or even negative. Figure 7 shows that 10-year real gold returns are low following highs.

Addressing the Golden Dilemma

The golden dilemma that Erb and I first proposed more than a decade ago remains unresolved: Either this time really is different and recent trends in gold prices represent a new normal and a perhaps permanent structural change, or gold prices will revert towards their historical mean.

Certain key points are worth remembering. The first and most obvious: Gold is volatile—as volatile as the S&P 500. But while it may not offer reliable protection against inflation, gold is relatively uncorrelated to the stock market. Figure 8 shows the average correlation is near zero. While the correlation has increased over the past 25 years, it is less than 10% today.

This low correlation qualifies gold as one among a class of assets and strategies that provide protection in market drawdowns, inflationary episodes, and recessions. But gold should not be the only asset in this sleeve. Diversified commodity portfolios, inflation-protected bonds, and such positive convexity strategies as long put options and trend-following strategies may offer similar downside protection.

Warren Buffett’s admonition about gold’s potential flaws as an investment is worth keeping in mind. “Gold,” he opined, “has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”3

In the end, gold has a long history as a hedging asset with consistently low correlation to the stock market. But expectations must be tempered. Gold is as volatile as the stock market. That means that we cannot always count on gold to do the job.

Further, the golden dilemma still exists. The real price of gold resembles a price-to-earnings ratio for equities. Very high P/Es are often followed by low expected returns. Gold’s historical record suggests a similar pattern. The dilemma is that this time might be different. A collapse in confidence in the U.S. dollar as the world’s reserve currency could thrust gold into a new regime.

 

Campbell Harvey, PhD is a Partner, Senior Advisor and Director of Research at Research Affiliates, LLC. This article is general information and does not consider the circumstances of any person. Please read our disclosures concurrent with this publication: https://www.researchaffiliates.com/legal/disclosures#investment-adviser-disclosure-and-disclaimers.

End notes

1. This law was effective December 31, 1974 and repealed parts of the Gold Reserve Act of 1934.
2. This is an update of the analysis in Harvey et al. (2019).
3. Buffett, Warren. Ibid.

 

14 Comments
James
May 13, 2025

Whatever one thinks about gold - money, an investment, security or pure speculation, it can work in providing portfolio diversification and enhance overall return, especially in volatile markets.

I note that Chris Brycki, of the ETF investing "Stockpot" service, uses a reasonable allocation of gold, via the "GOLD" ETF in all his portfolios. Perhaps he'd like to weigh in as to why and how it works, as one component of asset allocation? (Disclaimer: I have nothing to do with Stockpot whatsoever and have no investments with them)

I'm guessing that perhaps it's used as a hedge and that when equities go down, the gold holding usually goes up, and rebalancing to the targeted percentages allows buying of more equities when they are temporarily cheaper?

HamM
May 12, 2025

You can compare shares, gold and fiat money till the cows come home.
Each person's financial position is different.
I bought a life insurance in the 70s, after moving to another country, the company would not honor the insurance.
I bought shares in the 80s and the company went up in smoke (the director was milking the company)
I then used the premium for life insurance to buy gold, now I'm in my late 80s. No shares, no life insurance but plenty of gold. Can I go laughing all the way to the bank?

Dudley
May 13, 2025

"now I'm in my late 80s",
"Can I go laughing all the way to the bank?":

If (($Gold / $Expenses) / Life_Expectancy) < 1, whistle past the cemetery.
If >= 1 laugh all the way home.

JohnW
May 11, 2025

I have enjoyed the article and the follow-up comments, thanks. I agree with David - leveraging to buy the nicest home to live in that I could afford at the time has been a great investment over a long time-frame, but what about shorter time-frames? I have not been buying gold personally but I am interested in why there is so much buying by central banks, esp BRICS countries. I am reading that 2 nuclear nations are exchanging rocket-fire, middle east hostilities, Russia/Ukraine, USA foreign debt and issues with servicing that debt, the drop in AUD value to the USD (the currency used for gold sales) and movement towards nationalism from free-trade.
My response has been to buy shares in a range of Australian gold companies that are currently making all-time high profits, with the upcoming quarterly reports likely to be their best. I will hold them while the macro environment looks positive for gold. Shares are so easy to buy and liquidate. Up 115% in under 2 years and just sold one holding up 325%.

David
May 11, 2025

Here are a few words of wisdom from Alan Greenspan, ex governor of the Federal Reserve:
"Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewelry. It's not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating."

Jason
May 15, 2025

Didn't Greenspan use his wisdom to promote deep negative real interest rates during a growth cycle and hence contribute to the GFC? I think his words are rather flakey. That said, I'm surprised that the super funds don't have at least a few percent allocation to gold. I understand that most ultra wealthy have gold bars stored somewhere for some reason.

Kevin
May 10, 2025

People are not rational. Gold will always be the perfect example of how irrational people are.

The dow started at ~ 40 points,in round numbers call it 130 years ago Give the gold lovers 2 ounces of gold for $40. 130 years later their gold is worth what $7,000. The dow is at what 40,000.Then add on 130 years of income ,the gold lovers will still say that means nothing,you must have gold..

Easily proveable ,use the accumulation index ( AXJOA ).it starts at 1000 in 31/12/79.,use 1/1/80 as the start date.Gold around US $ 850.Try to make gold look good,give the gold lovers 3 ounces of gold for $850 to really try to make it look good Round that up to the A$20K those 3 ounces of gold might be worth today.The acc index is ~ $105K.. Is $105 K more than $20K.?. In the coming 12 months those companies in the acc index will pay dividends.Gold will pay nothing at all

The answer is still the same NOOOO.... you must have gold,it is the most wonderful thing on the planet,everybody should own it.

Compare it to the all ords, 500 on 1/1/80,and give them an ounce of gold for exactly the same price $500.. Gold @ what A$6,000,the all ords at ~ 8,000,plus 45 years of dividends.Still the same answer. NOOOO....gold is wonderful.

Another Buffet saying,it doesn't matter how many facts and figures people are given.They will prove nothing if they don't want to see it.

I wouldn't touch gold or even think about buying gold. However if you want to see how irrational people are............

David
May 10, 2025

I personally do not believe gold is an investment. Rather, in spite of universal government opposition, I believe it is money, as it was and has been for thousands of years, until 1933, when it was brutally suppressed by a Presidential Executive order, Trump style. The biblical parable of the talents indicates that as money it should be invested in productive enterprise and not buried in the ground. However there are times when money need to be available as money for opportunities rather than being unavailable locked-in in investments. Gold, rather than fiduciary money, may be the better way to keep the money, especially in countries with high inflation rate. Gold in Germany in 1923 would have been much better than paper notes, is an extreme example. A small amount of gold is a bit like insurance, a get out of jail card in a nasty spot. Not an investment, but a protection.

Dudley
May 10, 2025

"protection": Destitution insurance?

Graham W
May 09, 2025

It is clear to me that the answer to deciding what your investment strategy is that a 10 percent allocation to gold has always been a sound decision. Comparing returns to other investments is not the decision. The safety of gold having no counter party risk is protection not available elsewhere apart from cash. My 10% in bullion was not easy to acquire in my SMSF around 15 years ago, probably a reason why only 1% of investors have any gold. Do I rebalance my portfolio after the 300% gains is the question.

Ruth from Brisbane
May 15, 2025

Well done Graham W. I think a lot depends upon whether you want to pass something on to descedants. I.e. 10% is a good rule of thumb for insurance, but those building generational wealth seem to prefer 25%. You chose well, but I wouldn't go back to 10% in a hurry, because the price is likely to go higher as a result of fiat currency decline and general unrest and change in the world. You might like a flutter on silver with some gold sale proceeds as although it's more volatile it's still a real asset and still quite cheap c.f. its 1980 high in real terms. That's my 2 cents. (Hang on, I think it's 0.2 cents now.)

David
May 09, 2025

I purchased my house in inner suburban Sydney in 1970, the year before the Nixon shock, when gold was $US35 per ounce. I paid the equivalent of 700 oz (and that is assuming that 1AUD (10 shillings) was worth around $1USD) . Today, that same house is worth around 350 oz of gold. I am so glad that I did not borrow in gold to purchase it as I would probably still be paying off the loan. In terms of gold, most Australian real estate has fallen in value. My point is, basically, that the AUD is no measure of value, as inflation is a policy espoused by both potential government parties. As the famous and astute John Maynard Keynes once observed: "By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

David
May 09, 2025

One other point I would like to make is about Warren Buffets famous saying about gold, namely that if you start with one oz of gold and keep it for many years you will still only have one oz of gold. In Australia, this is not quite true, as that original one oz of gold is accruing continually a capital gains tax liability, which upon its sale will crystallize and potentially reduce its value considerably. The answer to that of course is to never sell gold, but keep it in the family, passing from generation to generation. How is it then useful? It can be used as lone collateral, to help each generation into housing, with the family obligation to pay off the loan and pass the gold to the next generation.

IanD
May 08, 2025

There's a lot to read at the moment about how wonderfully gold performs compared to stocks, but we shouldn't forget stocks have a yield and gold does not. Comparing gold with the ASX200 Accumulation index over the last 30 years, even including gold's recent rush of blood, gold has a CAGR of 7.7% and AXJOA has 9.5%. Ok, depends very much on your start and end points, but all comparisons are like that.

 

Leave a Comment:

RELATED ARTICLES

The shine is back on gold, and gold miners

Gold: trustless, rustless, shiny, and tiny

What's driven the big rally in gold?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

An enlightened dividend path

While many chase high yields, true investment power lies in companies that steadily grow dividends. This strategy, rooted in patience and discipline, quietly compounds wealth and anchors investors through market turbulence.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

CBA, AUSTRAC and our Orwellian privacy laws

Imagine receiving an email from your bank demanding to know if you keep cash at home and threatening to freeze your accounts if you don't respond in seven days. This happened to me and it raises disturbing questions. 

Latest Updates

Superannuation

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Superannuation

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Property

Why we can't separate housing policy from migration policy

Australia is running world-leading population growth rates but neglecting housing supply. We need to ask better questions and form a population plan linked to housing, infrastructure and employment opportunities.

Shares

Compare the pair: Expensive versus cheap

Are market leaders overpriced - or rightly priced? When Netwealth, Fisher & Paykel, and Aristocrat outperform their 'bargain' peers for years, it’s time to rethink what cheap really costs investors long-term. 

Shares

Maintaining dividend income in turbulent times

Australia's stock market is more insulated from tariff shocks than most. What's more, any volatility could provide opportunities for investors to build exposure to solid dividend payers at more reasonable prices.

Economy

The US is no longer a model for democracy

America prides itself on being a Government of the people. But the nation that invented modern democracy is no longer the model for it, and compares unfavourably to other regions where democracy is taking hold.

Fixed interest

Corporate bond opportunities in today’s market

Investing directly in corporate bonds and credit securities has advantages over owning these assets through managed funds or ETFs. They can also provide investors with attractive income and total returns over time.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.