Analyzing the Current Gold Price Surge

There’s a saying in the City of London about gold, roughly translating to: “Allocate 5% of your portfolio to gold (or whatever the fashionable percentage is at the time), and pray it doesn’t go up.” However, gold seems determined to keep rising. Gold prices are currently approaching $3,800 per ounce, and this isn't just a dollar-denominated phenomenon. Gold priced in pounds sterling has also hit record highs, nearing £2,800 per ounce.

Even in Swiss francs, considered one of the world's acknowledged “hard currencies” and less susceptible to devaluation risk than ordinary fiat money, gold has performed remarkably well. Gold priced in Swiss francs is up over 25% since the start of this year (33% in GBP and 44% in USD).

The question is: Will this rally continue? And, as the old saying implies, is this something to worry about? Let's look back at history and see if past cycles offer any clues.

Reviewing Historical Gold Bull and Bear Cycles

In modern memory, gold's bleakest period was before the dot-com bubble burst in 2000. After peaking in 1980 (the tail end of a high-inflation cycle), gold fell to its nadir in 1999. During those 19 years, the world was (broadly speaking) in an era of “non-inflationary growth” – even when economic growth was strong, interest rates were falling.

Subsequently, the rise of China and Western over-leveraging propelled markets toward the 2008 financial crisis. Gold’s gains continued until 2011, partly due to its safe-haven properties and partly boosted by the commodity boom fueled by rapid Chinese development.

By 2011, the other reasons underpinning gold’s rise no longer held water. Quantitative easing had only inflated asset prices and failed to trigger inflation elsewhere. The US economy began to recover, and the US dollar strengthened. Stock markets (particularly US equities) regained their allure.

Gold experienced a brutal bear market from 2011 to 2016, driven by deflation fears and an ever-expanding bond bubble (a contentious view). The end of the Eurozone crisis's most severe phase also dampened demand for gold.

In retrospect, two factors may have triggered gold's choppy recovery after 2016. Firstly, escalating geopolitical tensions (typical events include Trump's election as US president and the UK's Brexit referendum). Secondly, 2015 effectively marked the end of a deflationary cycle in many major economies. Since then, even during the economic plunge caused by the Covid-19 pandemic, consumer price inflation in both the UK and the US never returned to the lows of 2015.

During and after the Covid-19 pandemic, gold consolidated its gains amid volatility until it started surging again in early 2024. The core driver of the current gold bull market is market anxiety about the monetary system.

Essentially, after non-Western countries realized that the US had the full capacity to use its monetary hegemony as an economic weapon, their central banks spent years massively increasing their gold holdings as an alternative to the US dollar.

If you think about it, this is just a global manifestation of a more fundamental issue: in a world where governments are fiscally strained and countries no longer blindly seek cooperation (and sometimes even antagonize each other), there’s a lack of trust in “whether promises and contracts made by others will remain reliable.”

Overall, the core drivers of the current gold bull market are “fear of radical change, anxiety about bad news, and a lack of trust” – rather than anything else.

What Will End the Current Gold Bull Market?

If that's the case, what could end the gold bull market? Here, “end” doesn’t mean a short-term correction or a mild pullback, but rather a recurrence of a bear market similar to 2011-2016. This mainly hinges on two interconnected factors: fiscal and geopolitical.

Fiscally, as long as countries continue to behave as if they have “no spending constraints” and postpone debt problems indefinitely, the financial system will be prone to fragility. Whether driven by concerns about inflation, bond market revolts, or debt defaults, gold’s allure as a safe-haven asset will persist.

Geopolitically, if countries decide that the US dollar is no longer credible, and the reality is: there’s no other fiat currency to replace it, then gold as an “unregistered asset” (rather than “a promise from others”) will serve as a temporary alternative until a more attractive reserve asset emerges (this could take a long time).

Finally, if other “real assets” are relatively more attractive, attention on gold might decline. But currently, US stock markets are nearing record highs, real estate prices are far from cheap, and gold doesn’t seem to have many competitors in the short term.

If one had to guess what would ultimately end this gold bull market, the most likely candidate might be “the US returning to fiscal discipline.”

This would undoubtedly be a major surprise. Clearly, people are utterly unwilling to admit that “President Trump's policies may have had certain merits, and could have led to higher-than-expected fiscal revenues.” But collective blind spots are worth paying attention to – because major market surprises often stem from them.

That being said, this is not an outcome worth betting heavily on at the moment.

Gold Allocation Recommendations

Therefore, if you’re worried about your gold holdings (e.g., from a valuation perspective, the proportion of gold in your portfolio might be far higher than it was at the start of the year), you can reduce it to the regular allocation percentage. In other words, if you think gold should account for 5% of your portfolio, and the current proportion is 10%, then halve it.

But so far, gold hasn’t shown typical signs of “topping out” (like appearing on magazine covers, etc.) – those kinds of signals are what would truly convince me that this rally is nearing its end.