Beware the scorching gold rally

HE JARGON of gold trading echoes that of poker. “Strong hands” are investors loyal to the metal no matter the price. “Weak hands” are flaky punters who fold at the first sign of trouble.

- The Economist

Bullish investors win when they convince others of their story for why the price is rising, which boils down to why, this time, strong hands outnumber weak ones. Their bluff is called when the market softens. If the price does not rebound, their story collapses. If it does, it gains credence.

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?

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.