The extraordinary rally in gold may not be sustainable, warns John Higgins, Chief Markets Economist at Capital Economics. Higgins believes the metal’s price has climbed far beyond its “fair” value, suggesting that a bubble could be forming.
According to his analysis, the recent rise in gold has not only outpaced inflation but also broken from its traditional relationship with other real assets. “At the start of 2025, the price of gold was already close to its prior peak in real terms, which it had reached in 1980,” he wrote. “But now, the real price of gold is nearly 60% higher than that peak, and more than three times its average since 1980.”
Gold has long been viewed as a safe haven during uncertain times. However, Higgins noted that the current upswing is not being driven by usual factors like declining real yields or persistently high inflation. “Since gold pays no interest, the opportunity cost of holding it declines when the yields of such bonds fall. But those yields have generally been rising,” he said, pointing out that the historic correlation between Treasury Inflation-Protected Securities (TIPS) and gold has “broken down in recent years.”
He also dismissed the notion that inflation is behind the rally, emphasizing that “Inflation has been trending down since its post-pandemic peak, even if it remains higher than the Fed would like.”
Instead, Higgins pointed to speculative dynamics as the likely catalyst for gold’s recent surge. Factors include “reserve managers diversifying out of the dollar,” higher ETF allocations, “growing demand from China,” and “the simple fear of missing out.”
Still, some of these drivers may have more lasting effects. “Some of these factors may be ‘structural’ and therefore continue to underpin the price of gold,” he said. “But it also looks increasingly possible that gold is in a bubble that will burst before long.”
The warning comes as gold remains near record levels, supported by heightened geopolitical uncertainty, strong central bank buying, and retail investor enthusiasm. But as Higgins suggests, the market may have detached from economic fundamentals—raising the risk that the next significant move could be downward.
Spot gold prices slipped 1.8% on Tuesday, dropping $77 to $4,283 per ounce as of 09:38 GMT.