You’ve probably heard by now that the gold price has been on a tear, but I suspect many of you won’t realise just how well it’s done over the last few years.
Like many investors, including the Sage of Omaha himself, Warren Buffett, I’ve been at least cautious and sometimes downright cynical at worst about the barbarous relic that is gold.
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Yet so far this decade, gold has outperformed the AI-fuelled gains of the S&P 500, and that outperformance is even more pronounced when measured against the equity performance of the rest of the world.
Over 10 years, gold has risen 228pc (in dollar terms) in value while the FTSE All-Share has provided a total return of just 47pc.
Over more recent timescales, the gold price has risen by around 30pc since the US election, with a noticeable jump following the rollout of tariffs on April 2.
Adding fuel to the fire, gold prices have broken out of trading ranges in the last two weeks, even as the dollar has stabilised in value against other currencies. The dollar has been weak since Trump’s re-election, and gold tends to increase in value when the dollar falls.
The inverse relationship between the dollar and gold highlights a key truth about gold.
Yes, it’s a store of value, but fundamentally, it’s a collection of narratives.
We tell ourselves, for example, that gold performs well during heightened geopolitical risk. Usually, it does, but not always; gold prices initially rallied in 2022 after the Russian assault on Ukraine and then spent the next nine months going straight down. We also claim that gold consistently performs strongly during inflationary surges.
However, gold’s performance after the initial outbreak of Covid was underwhelming, as it fell from August 2020 through to spring of the following year, just as inflation ramped up.
Currently, the consensus is that gold benefits from concerns about fiscal unsustainability and expanding government deficits. Many investors I speak with now believe that $4,000 (£2,958) an ounce is inevitable: investment bank JPM has indeed predicted this, and they are not alone.
As you can see, I’m cautious about all these beliefs regarding relationships, suspecting that some of them may be true some of the time but certainly not all the time.
More importantly, it’s essential to understand supply and demand. For gold, two sets of figures are worth watching closely: central bank buying and purchases from Asia, particularly China.
One analyst, Rohit Paul of Acuity Knowledge Partners, suggests that for the third consecutive year, central bank gold purchases have exceeded 1,000 tonnes.
An intriguing perspective on this comes from UK bond investor Ian Williams, who also manages a gold and precious metals fund for Charteris (which I’ve invested in).
He believes the recent bull run in gold was sparked by the decision to freeze the $300bn of Russian bonds held in Euroclear.
“This caused the Chinese central bank to question the security of their own holdings of US Treasuries,” says Williams.
“As a result, the Chinese started to reduce their Treasury Bond holdings, which at the time was about $1.2 trillion, and switched into gold bullion, transporting the gold back to Shanghai, where it cannot be confiscated.”
There’s every reason to think that in a volatile geopolitical environment dominated by America First policies and pressure to lower interest rates, the dynamics favouring more central bank buying might continue. If the bulls are correct and gold prices are set to rise – a big if – what are the options for investors?
One way to play gold prices is through shares in gold miners. These have traditionally performed very well when gold prices increase, but suffer when prices decline.
In fact, most gold mining equities lost value over the four years from late 2020 through to 2024, despite gold prices rising steadily. According to Williams, this breakdown in the relationship between gold and gold equities has a straightforward explanation – central banks purchase gold bars, not gold mining equities.
By the beginning of 2025, that had all changed. The FTSE Gold Mines Index rose 57pc in the first half of 2025, compared with gold’s 25pc gain, in US dollar terms. So far this year, the gold price has gone up 30pc, and one gold miner’s ETF had nearly doubled in value.
Gold mining stock bulls reckon there’s more to go in this rally, especially as new gold mines are few and far between. There have been hardly any big new finds in the last 30 years. Even those that do emerge take time to permit and develop. Throw in lower energy costs, and you can see why gold miners’ profits are booming.
The bears, of course, have plenty of arguments that push back against the bulls. Given that no one really knows the fundamental value of gold, what happens if all those central banks stop buying, take profits and sell their gold bars? What happens if geopolitical risk dials down and Ukraine and Russia opt for a ceasefire? What happens if the US economy slows down, or, arguably even worse, if stagflation takes hold in the US and interest rates rise?
My own instinct, for what it’s worth, is that in the short term, gold looks a little overbought but might consolidate and head higher in the medium to long term.
Any one of the narratives I mentioned might push gold above $4,000 in the medium term. Fiscal incontinence and the dollar losing some of its shine as a safe haven seem most likely to deliver.
Many, including hedge fund manager Ray Dalio, have been advocating for as much as 15pc exposure in an investment portfolio, but that seems excessive. I’d be in the 5pc to 10pc range, perhaps with a bias towards gold miners.