Gold enters the storybook stage
Its price is now far above levels suggested by fundamental forces, but it’s hard to see what might stop its ascent
Ruchir Sharma
After surging for years, the price of gold has entered the realm where storytelling drives its price.
Breaking free of the fundamental forces that long explained its ups and downs, it is now rising on tales of global risk and uncertainty — which make this era feel to some observers like the gold rush of the 1970s.
Gold has long been seen as a safe haven because its price has kept pace with the rate of inflation for centuries, albeit punctuated by busts and booms.
The booms tended to come in periods when real interest rates declined.
As returns fell on money held in savings accounts or bonds, people tended to move their wealth into gold, which offers no yield but at least can rise in price.
That pattern started to change in a material way in 2023.
Real interest rates were high compared to the recent past and rising, but gold prices began to take off.
The main driver was a huge increase in purchases by central banks looking to shift their holdings away from the dollar, which the US weaponised for use in sanctions against Russia over the Ukraine war.
The price of gold has skyrocketed since then, but what I once called the “anti-dollar revolution led by foreign central banks” can no longer explain it.
Over the past year, the pace of central bank purchases has slowed down.
Jewellery demand has plunged as consumers balk at the high prices.
Instead, demand has exploded from investors in all the major markets from the US to India and the UK.
The investor share of gold purchases doubled last year to 35 per cent worldwide, led by torrential flows into gold ETFs.
Nowhere is the fervour more intense than in China, where retail “auntie” investors have jumped headfirst into the buying spree.
In short, gold is being driven largely by financial demand, and this shift is upending the traditional understanding of how to calculate its value.
The models long used to explain the price of gold, which include real bond yields and inflation expectations, have all broken down.
Relative to inflation, for example, the price of gold is now five standard deviations above its historical norm; put plainly, this is freakishly unusual behaviour.
Meanwhile, a model developed by the World Gold Council attributes more than 80 per cent of gold’s latest gains to “risk and uncertainty” or “residuals”.
That’s another way of saying scary stories and “we have no idea”.
The story gold bulls are telling is that the current state of the world evokes the backdrops of past gold super cycles — meaning long and strong bull markets like those of the 2000s and, especially, the 1970s.
But inflation today is nowhere near the double-digit levels of the Jimmy Carter era.
And it is hard to argue that uncertainties such as Donald Trump, tariffs and Ukraine are objectively more disconcerting than, say, oil embargoes, Vietnam and the Iran hostage crisis were back then.
Another popular argument is that gold continues to thrive as a haven from “dollar debasement”.
But if that is so, why have other alternatives to the dollar such as bitcoin been tanking, and why have other dollar assets like US stocks and bonds been holding up?
Gold also broke free of fundamentals in the later stages of its 1970s boom.
By the end of that decade, gold was selling for $500 per ounce, or about 2.5 times its implied value based on real interest rates.
Today the price of gold is five times this implied or “fair” value, at nearly $5,000 per ounce.
Nonetheless, it is difficult to see what might break this momentum.
Liquidity remains plentiful worldwide, so a lot of people are looking for more places to put money.
Even after the recent buying sprees, investors hold relatively little gold in their portfolios.
The 1970s super cycle ended only when the Federal Reserve began to aggressively raise rates to fight inflation, and there is little chance of that happening now.
Gold bugs therefore say the yellow metal has plenty of room to rise, and they may be right.
So far, in inflation-adjusted terms, it is up more than threefold over the past 10 years.
But that’s not much relative to its 12-fold rise during the 1970s.
And while prices may appear to have risen parabolically in recent months, the rise has been much less spectacular than the spike in the final stage of the 1970s boom, when gold doubled in price over two months.
While I have been bullish on gold for many years, I’m more agnostic now.
In a market divorced from fundamentals and driven by an increasing number of random stories, it is hard to know which narrative is for real and will hold.
If you want to buy more gold, you just gotta believe.
The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’
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