Investors are increasingly turning to gold, anticipating the next market bubble, whether that’s overheated tech stocks, rising government debt, or high inflation. But what if gold itself is the bubble?
This year, gold’s 56% rise is notable as it aligns with a strong recovery in US and global stocks since April.
The surge in physical gold demand, driven by global trade tensions and geopolitical risks, was initially seen as a safe haven or diversification strategy, especially after Donald Trump’s return to the White House in January. However, the gold boom persists even as stock markets have rebounded from April lows and uncertainty has somewhat subsided.
Loose global fiscal and monetary policies, including threats to the Federal Reserve’s independence, have also fueled global inflation concerns, affecting real interest rates and boosting the appeal of gold, which yields no interest.
The Trump administration’s desire to devalue what it perceives as an overpriced dollar adds complexity. Unlike stock valuations, determining if a gold rally has gone too far is challenging, as there’s no consensus on valuing gold.
Gold has more than doubled in five years, rising over 250% in the last decade. But when is this too much?
It’s clear that almost everyone remains optimistic, a behavior often linked to bubbles. This widespread bullish sentiment might make investors cautious about future trends.
Even as gold hit a record $4,100 per ounce this week, Goldman Sachs predicts another 20% rise by next year, Societe Generale views gold’s climb to $5,000 as “increasingly inevitable,” and JPMorgan considers its long gold position as one of its “strongest conviction cross-asset views.”
However, if everyone is investing in gold and its performance mirrors that of high-growth stocks, its diversification benefits may be questionable. Could gold still perform if stocks plummet?
Is Trendiness Peaking?
Without standard valuation metrics, like other commodities, gold’s bullish forecasts depend on supply and demand.
This demand is driven by central banks diversifying their reserves and exchange-traded gold funds attracting mainstream investors seeking alternatives to risky long-term government bonds.
As central bank demand appears steady, forecasters consider it ongoing, even as prices rise in anticipation. The extent of this demand remains unclear.
Private investor demand is more perplexing. Bank of America’s monthly poll showed “long gold” as the second most crowded trade in September after U.S. tech stocks, yet over a third had no gold exposure, and those who did had an average allocation of just 4.2%.
Three aspects of gold’s rapid price rise raise concerns: its speed, its disconnect from uncertainty measures, and its detachment from real interest rates and the dollar.
JPMorgan notes that gold’s recent surge surpasses what falling one-year real interest rates would typically suggest, as lower real returns in other “safe” assets make gold more appealing.
They attribute this gap to physical demand and recommend buying during any real-rate-related dips.
However, JPMorgan and HSBC express caution about the implications if the anticipated Fed terminal interest rate for this cycle rises.
As inflation expectations grow, gold’s surge last quarter coincided with a nearly 50 basis point drop in the market’s implied Fed terminal rate to below 2.9%. But recent weeks have seen this rate tick higher, strengthening the dollar, helped by political developments in Japan and France.
Despite last Friday’s U.S.-China trade developments, economic policy and geopolitical uncertainty indices have declined since midyear. Yet, gold’s momentum has barely slowed. HSBC warns that easing global military or trade tensions next year could eventually impact prices.
The momentum and technical price trends of the recent gold surge could lead to an earlier-than-expected downturn.
Deutsche Bank’s team suggests September-October might have marked a “peak in trendiness,” with prices exceeding trends longer than usual.
No one wants to call an exact top, but they’re all cautious about a potential decline.
