Gold’s bull market is far from over – here’s how to invest
Since the turn of the century, the price of gold has risen more than fifteenfold, while the S&P 500 is a mere 8.5 times higher, after including dividends. Who’d have thought it? Selective dates, I hear you cry, but it remains true. In 2000, gold was on its knees after a two-decade bear market, while US equities were in a generational technology bubble, rather like they are today. Still, at no point have equities been stronger than gold this century, even at the depths of despair in 2015, following a 45% correction in the gold price.
Gold is a popular form of jewellery because of its beauty, timelessness and durability, but financiers like it because it is scarce and liquid. Being scarce means that governments can’t print more, making it an effective store of value. Being liquid means you can trade gold in billions of dollars at the touch of a button, whatever the state of the global economy. Gold provides the backstop to the financial system.
Our governments have borrowed too much money, and it’s an open secret that they’ll never pay it back. But they’ll pretend to do it the old-fashioned way, which is to print more money. That will devalue the currency, which ultimately means the purchasing power of money falls. The rising gold price will not only compensate for the falling pound in your pocket, but will also deliver something extra as the asset becomes increasingly sought after around the world.
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Why gold is a universal form of payment
Central banks have always believed in gold. Imagine trying to transact large sums of value around the world before modern payment systems were created. An ounce of gold was recognised from here to Timbuktu and still is to this day. Central banks hold much of their reserves in gold, both to protect themselves from inflation and to meet foreign liabilities when required.
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Before Nixon took the US dollar off the gold standard in 1971, the central banks typically held 60% of their reserves in gold. The figure spiked in 1979, after high inflation in the 1970s, as the price soared. Then we had the “Volcker Moment” in 1980. The then-chair of the US Federal Reserve, Paul Volcker, hiked interest rates to an unprecedented 20% to fight off inflation, which then embarked on a four-decade decline, up until Covid.
Richard Nixon paved the way for higher inflation by taking the US off the gold standard,
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In the 1980s and 1990s, with inflation low and growth solid, the central banks lost interest in gold. Their share of reserves fell until 2008, just in time for the global financial crisis. Gold reserves then stabilised at 10%. After the invasion of Ukraine they started to rise for the first time since the 1970s. The 2022 war in Ukraine, which is still ongoing, saw the US and Europe freeze Russia‘s reserve holdings of US Treasuries. Central bankers, especially in the Middle East and Asia, took note. If Russia’s reserves could be confiscated, so could theirs. The diversification into gold grew at the expense of US Treasuries, with China leading the charge.
Today, gold’s share of reserves has grown to nearly 30%. Some of that can be attributed to a rising price, but the central banks have also added a staggering 4,500 tonnes to their holdings, worth $20 billion. With such high demand, gold has been able to shrug off the impact of higher interest rates.
The relationship between gold and real yields
Since gold pays no interest, it has traditionally moved inversely to bond yields. If rates are at 10%, it is more expensive to hold gold, in terms of opportunity cost, than if they are 1%. Inflation matters too: if yields are 10% and inflation is also 10%, the real yield is zero. Gold is said to be an inflation hedge that maintains its purchasing power over the ages. In that sense, the real yield has always been a more important driver for the gold price than the yield itself.
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But there are different types of inflation. Consumer prices (CPI) reflect the cost of living, which many believe to be understated. Then there is monetary inflation, or the money supply, which has grown at an average rate of 7.5% for three decades. For most gold watchers, this is the number that really matters. If the amount of money increases, gold will appreciate and act as a balance.
It turns out that the growth of the value of the above-ground gold supply follows monetary inflation over the long term. Indeed, this is the basis for the World Gold Council’s expected return framework for gold. They say the gold price should match nominal GDP growth over the long term. That is real growth and inflation combined. Since nominal GDP and the money supply normally match, gold follows the money supply, which is entirely logical.
It turns out that it does over the long term, but with cycles. There are times, like today, when demand from central banks and investors is high, and so gold rises faster than new money creation. And there are other times, such as the 1980s and 1990s, when gold gives up ground at a time when growth is robust and inflation contained.
In January this year, the price of gold touched $5,595. That marked a 434% gain from its $1,064 low in late 2015. The year 2025 was gold’s second-best in modern records, with a 65% rise, last beaten in 1979 with a 126% gain. That was too much, too soon and there can be no doubt that gold got ahead of itself. Since then, there has been a healthy 29% correction. I think the worst is behind us and a gradual recovery is underway.
The recent boost came in August, when US Treasury secretary Scott Bessent announced an intervention in the Japanese yen and then two weeks later increased purchases of long-dated Treasury bonds. The amounts of money involved were on the light side, but the signalling was explosive. Governments are worried about the rising cost of borrowing and are prepared to intervene. Whatever they say, everyone knows it means printing more money, and there is much more to come.
Scott Bessent is failing to keep US borrowing costs under control
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The gold price will hit $7,000 by 2030
In 2020, I wrote a piece entitled The Rational Case For $7,000 Gold By 2030 for the London Bullion Market Association (LBMA), the world’s trade body for gold. At the time, the gold price was $1,700 an ounce, and many dismissed my piece as pie in the sky. Yet the premise was simple: long-term expectations for inflation would shift from 2% to 4%.
So far, and according to official data, the shift has been gentle, but expectations are rising. The bond market, as measured by Treasury Inflation-Protected Securities (TIPS, inflation-linked US government paper), is not yet pricing in much higher consumer-price inflation, but is heavily concerned by public debt. Inflation expectations have not yet rung alarm bells, but with rising food and energy prices, and higher debt-servicing costs, it is a matter of time. Gold is signalling where the bond markets are headed, and that is not a happy place.
With $5,595 reached this year, my $7,000 target for 2030 looks plausible. I am confident that it will be achieved and wouldn’t be averse to increasing that target given what is coming down the road. Many Western governments are broke, yet continue to be spendthrifts. The worse the situation gets, the more investors will flock to gold to protect themselves from the carnage caused by rising interest rates.
In the interests of balance, I’ll explore the bear case. Under the right set of circumstances, that could be devastating for the gold price, just as it was in the 1980s and 1990s. But what would need to happen?
The US budget deficit is 6.1% of GDP. In practice, that means in 2026 they will spend $7.4 trillion against tax receipts of $5.6 trillion. That is a $1.8 trillion annual deficit. Then consider that their outstanding debt recently exceeded $40 trillion, a sum that keeps growing. In Germany, the deficit is 2.8%, in China 4.5%, in the UK 5% and in France 5.7%.
Austerity would mean balancing the budget, which the UK last managed to do in 2001. With a balanced budget, as the economy inflates and grows the ratio of debt to GDP soon declines. Do that for a decade or so, and debt servicing returns to being a minor expense. Take Ireland, where debt ballooned to 120% of GDP after the 2008 crisis. With an enforced austerity programme, it has now slid to 33%. Portugal was at 140%; now the figure is 91% and falling. The Netherlands, Denmark and Sweden all have low debt-to-GDP ratios despite being “progressive”. If the major industrialised nations balanced their budgets, or even signalled their intent to do so, the price of gold would fall. But with the US, the UK, Japan, China, Germany, France, Italy and others still behaving badly, we are not there yet – or frankly even close.
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Gold is a buy until the political winds change, which will one day happen. The electorate in Argentina surprised us all when they chose president Javier Milei with his chainsaw. The people were fed up with an over-indebted, failed state, and they opted for austerity over chaos. The real surprise was that the support came from the youth, who gave him 70% of their vote.
It comes down to the simple fact that today’s debt is tomorrow’s problem. Governments that borrow to pay their bills are passing the bill to the next generation. There comes a time when austerity shifts from being perceived as an immoral choice to becoming the only choice. When that happens, it will be time to reduce your gold and switch back to bonds, possibly at very attractive interest rates.
Gold investments to buy now
You can invest in gold in a number of ways. My clients at ByteTree hold the gold exchange-traded fund (ETF) known as the iShares Physical Gold ETC (LSE: SGLN). They also hold the Silver ETF, iShares Physical Silver ETC (LSE: SSLN) and gold miners through the VanEck Gold Miners ETF (LSE: GDGB). Silver and the miners tend to do much better than gold in a rising market, but fare worse should the gold price fall.
British investors who want to touch their gold should hold Britannias or Sovereigns, which are free of capital gains tax. They can do this through a reputable dealer such as Sharps Pixley or The Pure Gold Company. But if you do buy physical gold, please keep it in a vault. And if you insist on keeping it at home, then the best security is not to tell anyone!
For the adventurous, add a little Bitcoin into the mix. I created the BOLD index, which combines bitcoin and gold on a risk-weighted basis. Bitcoin is often considered digital gold since the supply is constrained and it is a store of value. Rather than have a 50/50 split, I weight according to volatility.
That means more gold than bitcoin, since it is less volatile. That manages the risk and since the assets have low correlation and act independently, BOLD rebalances the portfolio each month. BOLD reduces the stronger asset, adding to the weaker asset, in a top-secret investment strategy known as “buy low, sell high”. The result is a strategy that has similar volatility to gold, but with higher historical returns. BOLD is available as an ETF, the 21Shares Bitcoin Gold ETP (LSE: BOLD).
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
