Uncommon truths: Gold as seen from both sides

Models suggest gold would need to be at $9,300 if the US were to return to a gold standard. However, most components of demand are falling and it is really hard to explain the recent surge in price with traditional models, even allowing for geopolitics. This dilemma could explain recent volatility. 

In March 2025, I wrote a piece entitled: Why is gold at $3000? At that time, I struggled to explain the price level based on traditional models, even allowing for geopolitical dummy variables. Well, it recently peaked at near $5,600 on 29 January (having started 2026 at $4,320), since when it fell below $4,500 on 2 February before recovering some of those losses. Given the levels and the volatility, it is time to take another look. 

The high volatility comes as no surprise. As shown in a recent Uncommon truths document, gold has tended to have similar volatility to equities. Nevertheless, and despite limited ultra long-term returns, that document makes the case that gold can play a strategic role in multi-asset portfolios (with an even bigger role envisaged for broad commodity exposure, due to limited correlation with other assets). 

Even better, a simple “gold standard” model, used to calculate the price at which US official gold reserves would fully back US notes and coins in circulation, gives an answer of $9,300 (as of December 2025, as shown in Figure 1). 

Such an analysis may be pertinent in a world in which government debt/GDP ratios are high and are predicted to go much higher. For example, both US and UK net government debt to GDP ratios are currently around 100%. Office for Budget Responsibility (OBR) forecasts suggest the UK ratio could rise to around 270% over the next fifty years and Congressional Budget Office thirty-year forecasts suggest US debt is on a similar trajectory. Apart from the high starting point, the OBR analysis cites lower population growth, an ageing population and climate change as important contributory factors in the escalation of debt. In the case of the US, I would imagine that current immigration policies may reduce population growth, thus aggravating the debt situation. 

Those predictions sound frightening and my own analysis comes to similar conclusions (see The UK is not alone). Indeed, my own simple model suggests that US government net interest payments could be above 10% of GDP by 2075 (up from 3%-4% in 2025), with the risk of a much higher burden if markets demand higher rates (which I would expect them to). 

That sounds unsustainable to me. So what can governments do about it? The healthy answer is that they start to run primary budget surpluses (i.e. the balance before interest costs), as Italy has largely done since 1992. As this involves lower spending and/or higher taxes, most governments struggle with such an approach. Then there is the option of default, either by not repaying debt or by creating inflation. Argentina has shown that not repaying debt doesn’t have to be terminal but I suspect it would be very disruptive if done by a wide range of governments, including the US. Creating inflation may be tempting and one way to do it could be to encourage (oblige) central banks to buy ever increasing amounts of government debt. However, I suspect that would be the road to financial instability, which I think could lead to calls for a return to some form of gold standard. 

Which brings us back neatly to the above cited theoretical price of $9,300, should US gold reserves need to back the notes and coins that are currently in circulation. That sounds like a big leap from here but is not even the doubling that we have seen in the last 18 months or so (assuming a current price of $5,000). 

What could stop gold rising to such a level? The first answer is that the price is already highly unusual. When measured in real terms (using the US consumer price index), gold is currently five-to-six standard deviations above the post-1971 average (a date chosen to capture the period since the price of gold was liberated). That’s a lot! 

Normally, when the price of a commodity rises, demand falls and supply rises, developments which tend to limit the price gain. I would expect the supply of gold to be rising, since a price of $4,000-$5,000 makes it profitable to exploit many previously uneconomic reserves. However, it is a slow process to open new mines, though production can be accelerated in existing facilities and recycling activity can add to supply. Indeed, World Gold Council data suggests supply increased by 1% in 2025 (recycling supply was up 3%, but the 1% gain in mine production was balanced by producer hedging activity). 

The evidence is more straightforward when it comes to demand, as shown in Figure 2. The largest component of demand has historically been jewellery. But alternatives are available (silver, platinum, palladium, say) and jewellery demand has been falling since 2022, as the price has risen. After an 8% fall in jewellery demand in 2024, there was a further 19% decline in 2025. Given the spike in the gold price in early 2026, I would imagine that jewellery demand will again fall this year (assuming the price rise sticks). 

Central bank purchases became an important source of demand in 2022 but fell 21% in 2025. This makes sense, since if a central bank thinks gold should be a fixed percentage of reserves, a sharp increase in price requires fewer purchases. Further, my eye was drawn to an interesting news alert on Bloomberg (on 12 February), to the effect that Russia could return to the dollar based settlement system, as part of a peace settlement. Since it was Russia that launched the big central bank purchases of gold in 2022 (to avoid the dollar based financial system), what would such a reversal (if enacted) imply for central bank purchases? 

Technology demand includes items such as dentistry, semi-conductors etc. but is relatively small. Nevertheless, and despite the surge in chip production, overall technology demand was down 1% in 2025 (it’s hard to imagine many of us choosing gold implants or dentures at these prices). 

That leaves investment as the only broad category of demand that increased in 2025 (by 84%). Purchases of bars and coins were up 16%, while ETF flows transitioned from the small negatives seen since 2021 to a big positive. Investment demand has a complex relationship with price. At some stage, a higher price may dampen demand as notions of value dominate. However, there may also be an intermediate phase when behavioural aspects dominate, with the result that higher prices lead to higher demand. Those behavioural aspects can include the dopamine buzz that comes from short-term price gains, the fear of missing out and a basic herding instinct whereby we feel safer in a crowd. Hence, momentum builds rather than fades as prices rise, resulting in the exponential price gain that is typical of manias. As ever, the million dollar question is at what price will momentum buying turn into profit taking?

Perhaps the tension that is apparent in the recent volatility of gold and silver suggests the transition from momentum buying to profit taking may be occurring. Then again it may simply be that, after the strong gains of the last year or so, a period of consolidation was needed before resuming an upward path. 

Recent investor meetings have revealed support for the notion that dollar weakness in 2025 could explain the strength of gold. Even better, the logic goes, if the dollar continues to weaken (as I expect), then we should expect gold to continue strengthening. My answer to that is that I believe a weakening dollar should support gold (other things being equal) but that the rise in the price of gold in 2025 and 2026 is way beyond anything that can be explained by the degree of dollar weakness we have seen. 

In order to test this I have run of refit of my econometric model for gold, based on data from December 2009 to January 2026 (thus taking account of the recent surge in price). The basic model (“Post 2009, no dummies” in Figure 3), tries to explain gold as function of the 10-year US TIPS yield (real yield), the 10-year US inflation breakeven yield (to represent inflation expectations) and the trade weighted US dollar. Unfortunately, the coefficients derived from that model no longer make sense (those on the real yield and trade weighted dollar variables are positive) and the adjusted R-squared is only 0.39 (for what it is worth, that model suggests a “fair value” of $2270, as of end-January 2026). 

Those model results suggest that something else is driving gold, leading to omitted variable bias. I suspect the omitted variable is geopolitics. To this end, I have introduced a number of dummy variables to capture the effect of what I think were important developments. The first presidency of Donald Trump seemed to coincide with a change in the behaviour of gold, so I have introduced a “Trump 1” dummy variable to capture his first term. The next big event, in my opinion, was Russia’s invasion of Ukraine in February 2022, which sparked large purchases of gold by Russia’s central bank (a “Putin” dummy variable tries to capture this). Then came the Hamas attack on Israel in October 2023, which coincided with a reversal in the direction gold, since when it has not stopped climbing (“Gaza” dummy). Finally, I have introduced a “Trump 2” dummy variable, as the impact on gold seems to have been much bigger during his second term. 

All of the coefficients in the model with dummy variables are now in the direction I would expect and are statistically significant (except for that on the inflation breakeven, which is negative and not statistically significant). The adjusted R-squared is 0.87. However, Figure 3 suggests that even this enhanced model (“Post-2009 with Trump, Putin and Gaza dummies”) struggles to explain the recent price surge (the model predicted price was around $3,500, as of end-January 2026). Hence, I find it really hard to justify the current price, even when introducing geopolitical factors. This does not mean the price cannot go higher but I would struggle to explain any such move (regular readers know that I have battled with that for some time!). 

All data as of 13 February 2026, unless stated otherwise. 

Investment risks 

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.