Gold Euphoria - Speculation or a Store of Value?

Gold has traditionally been thought of as a "risk off" asset. When investors flee from equity selloffs, gold can offer a refuge. Concerned with political risk,?... add to gold to offset the unknown.

More recently gold appears to be a "risk on" asset. Stock markets doing well... the logic appears to be buy gold. Crypto hitting new highs (so called digital gold), add gold as a side bet.

The price trend in gold has been volatile, but steadily increasing, over much of the last 20 years

The performance numbers are quite remarkable.....

11.41%.... The annualized return assuming steady compounding over the past 20 years (November 17, 2005 to November 17, 2025)

So far, so good,

But within this period, gold's price experienced a two year hockey stick return of

39%. ...The annualized return assuming steady compounding over the past 2 years (November 17, 2023 to November 17, 2025)

Chart above covers the time period January 1, 2005 to November 17, 2025 : 20.875 years

What ever happened to owning gold as a protection against ongoing currency devaluation? Is gold merely a commodity to be traded?

There is an argument that all major currency are being debased at a rate faster than official inflation numbers. The problem I have with this logic is that 10 year U.S. treasury bonds yield 4.1%. If debasement was severe, surely interest rates would be 8% to 10% in the U.S. and Canada? We can see examples of currency debasement, requiring investor compensation with a higher yield. 14.36% in Russia - 27% in Argentina (10 year government issued treasuries)

For the past 20 years U.S. inflation has averaged an annual increase of 2.6%. One can disagree, quite sensibly, that actual inflation has been much higher, but for now let's go with the official rate of inflation. If gold had maintained purchasing power over the past 20 years, gold would have appreciated from $485 per ounce to $795 an ounce (versus: November 17, 2025 price: approximately $4,070).

If we instead assume inflation is under reported and has has actually tracked at 5% per year, gold would today be valued at $1,287 per ounce, (if it was an inflation protecting asset).

Looking back even further, since 1971 gold has appreciated at around 8% per year (roughly the same level of price appreciation as the S&P 500). So lets go out on a limb and increase the price of gold at 8% per year for the past 20 years. Gold would be valued at an impressive $2,260 per ounce.

In Reality

From a November 17, 2005 price of $485 per ounce, gold has increased to $4,070 (November 17, 2025).

Gold increased at a compound annual growth rate (CAGR) of approximately 11.00% per year over the 20-year period. For the first 18 years in my sample time period, gold experienced a compound growth rate of 7.8% (very similar to gold's long term average return). Then massive appreciation occurred.

What might explain this last two year period? My own view is that hot money from Crypto and Meme stocks have partially migrated to gold. There is commonality to these three assets. No conventional method to value the asset. No earnings, no yield, non transparent pricing or limited knowledge of who owns the asset.

After being positive on gold for the past year I find the current price level to be above my own comfort level. Gold value over the next few years might depend on the retail investor; who appears to be already overextended in speculative assets. Pressure on crypto values could easily translate into selling pressure on gold holdings. I prefer to now stand aside and watch from the sidelines.

regards, Tim

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Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's. My comments are not to be taken as investment recommendations. They are purely for discussion purposes. Please see your registered advisor for investment advice.