The price of gold has broken out to new highs, and is trading at $2,920 per troy ounce, at the time of writing.
This latest gold bull market has been running for over nine years. The price dropped to around $1,074 an ounce in December 2015. This means that it's up 2.72 times, or +172%, in the intervening 110 months since then.
Monthly gold price, past 10 years (US dollars per troy ounce)
Source: Macrotrends
That's equivalent to a compound annual return of 11.5% a year. To put that into perspective, it's more than the average annual total return on US stocks over the ultra-long run, which is around 10% a year (including dividends).
Not bad at all. Especially for something that's considered nothing more than an inert lump by many people, and that doesn't generate a cash income for investors.
Actually, it's probably more accurate to call this a stealth bull market. That's because gold's performance as an investment has been excellent, but it appears to be attracting relatively little investor interest.
Most of the physical gold buying interest has come from non-OECD central banks in recent years, with China taking the lead. That's presumably as they seek to diversify their reserves away from the government bonds and currencies of highly-indebted developed countries (e.g. the USA, most of Europe).
The gold price shot up during 2024. Over the past twelve months it has risen by 45%, from $2,019 to $2,920 an ounce.
This is a huge move in a relatively short period of time.
Over the ultra long run, I'd expect the average annual rise in the dollar gold price to be something of the order of official inflation rates plus a couple of percentage points.
It's above inflation because the biggest gold buying countries are China and India. Both have vast populations and are getting richer over time. Wealthier people buy more gold.
So let's say 5% a year expected return, give or take, over the long run and in dollars, being 3% average inflation plus 2%. Those relatively modest long-term gains will be punctuated along the way with steep rises when crises happen, and there is a flight to safety, along with price drops or prolonged sideways moves when investor attention is elsewhere.
Actually, an October 2024 study by the World Gold Council argues that gold's long-term price progression is driven by global nominal GDP growth. Nominal GDP growth takes account of inflation (i.e. the progressive devaluation of fiat currencies), population growth, and productivity gains (people getting richer, as more is done with less). At first glance, this makes intuitive sense to me.
(Hat tip to Charlie Morris at ByteTree Research for pointing this study out to me.)
According to the study's findings, over the period from 1971 (when the dollar was unpegged from gold) to 2023, US inflation averaged 3.8%, global nominal GDP grew by 7.8% a year, and the dollar gold price increased by 8% a year. That's a pretty good fit, and means gold's dollar price outperformed inflation by 4.2% a year.
So my long-term gold return assumption of inflation + 2% may be too conservative. However, gold's dollar price played catch-up in the early 70s, once the dollar was untethered, and there has been a major longer-term bull market since 2001.
Hence the study's conclusion may only be because gold started the half-century to now at a very low point (in dollar terms), and now it's at a very high point. I'll continue to ponder it. But, for now, I'll stick with my more conservative long-term assumption.
Nonetheless, the latest 9+ years bull market performance has been way above that. And the price surge over the past 12 months is practically off the charts.
Tucked within my own portfolio, I have a decent allocation to gold and gold miners, so I'm happy with this outcome.
But such a fast move inevitably makes me wonder about whether this is too much, too fast, OR whether it's just the start of something much larger.
Outlined below are the main bull and bear arguments that I believe investors should consider when deciding whether to own gold, and how much of it to hold.
Remember, gold is the ultimate global asset, owned and traded all around the world. This means that it's influenced by a wide range of factors.
Reasons to be bearish about gold
It’s had a very strong run recently, and could be due a sharp setback in the short term.
The gold price has now passed its inflation-adjusted monthly peak of $2,768, which was briefly reached in January 1980. It's also above the peak reached in 2011, when the last 10-year bull market screeched to a halt. On this view, gold looks extremely expensive. (But also see the inflation counterpoint in the bullish section below.)
Inflation-adjusted gold price since 1971 (current US dollars per troy ounce)
Source: Macrotrends
President Trump is about to try to broker a peace deal in Ukraine. If successful, this would dial back macro geopolitical risk, reducing the chance of the conflict spiralling out of control (such as an exchange of nuclear weapons). That would remove one reason to own gold as a crisis hedge.
Things are also calming down in Israel / Gaza, reducing the risk of a broader conflict in the Middle East.
Let’s now turn to some of the reasons to be bullish about gold (there are more of them).