Gold's remarkable surge this year has captured everyone's attention, leaving many wondering: Is this the start of a new era for the precious metal? The S&P 500 closed yesterday at a new record, up 0.46% to reach 6,909.79. It's been a great year for investors, with the index up 17.48%. But imagine having a friend who invested in gold at the beginning of 2025.
The price of gold has skyrocketed, increasing by an astounding 71% year-to-date, currently trading around $4,514 per troy ounce. This friend is probably feeling pretty smug, especially compared to those who invested in the 'Magnificent Seven' stocks.
A common narrative attributes gold's rise to various factors: global trade disruptions from President Trump's tariffs, the ongoing Russia-Ukraine conflict, concerns about AI-related tech stock bubbles, Bitcoin's stagnation (down 7% this year), and rising inflation. Gold is often seen as a safe haven for nervous investors seeking protection against these uncertainties.
But here's where it gets controversial... According to recent research from Claude Erb and Campbell Harvey of Duke University's Fuqua School of Business, this explanation is only partially true. Their research suggests that the introduction of gold exchange-traded funds (ETFs) in 2004, which made buying gold as easy as buying stocks, has permanently increased its price.
Erb and Harvey noted that North American gold ETFs hold almost $200 billion, with another $175 billion in ETFs outside the U.S. This shift has significantly impacted the gold market.
The chart shows the effect on the price of gold following the introduction of gold ETFs. The chart shows the “real” price of gold, which adjusts its price for inflation.
Furthermore, the emergence of tokenized gold stablecoins—cryptocurrency tokens backed by gold reserves and pegged to the price of gold, which can be 'staked' in other risk assets like bonds—is likely to push prices even higher.
But don't get too carried away.
Erb and Harvey argue that gold isn't always a great hedge against inflation over the long term. Gold's price is highly volatile, while inflation tends to be less so. Investors hoping to beat inflation with gold can sometimes lose money for years.
Consider gold's performance against stocks. Over the last 40 years, gold has experienced long periods of price declines. The Comex continuous contract for gold versus the S&P 500 index over the last 20 years further illustrates this point.
So, has gold peaked? No one knows for sure. However, it's interesting that investment banks like Société Générale, Morgan Stanley, and Mitsui have expanded their precious metal trading teams this year. Other banks are also exploring re-entering the 'vault' business of storing gold reserves, as reported by the Financial Times.
Here's a quick market snapshot:
- S&P 500 futures were flat this morning. The last session closed up 0.46% to hit a new record of 6,909.79.
- STOXX Europe 600 was up 0.39% in early trading.
- The U.K.’s FTSE 100 was down 0.12% in early trading.
- Japan’s Nikkei 225 was down 0.14%.
- China’s CSI 300 was up 0.29%.
- The South Korea KOSPI was down 0.21%.
- India’s NIFTY 50 was down 0.14%.
- Bitcoin was at $87K.
What are your thoughts? Do you think gold's recent performance is sustainable, or is it just a temporary phenomenon? Share your opinions in the comments below!
