Gold may be in a bubble set to burst, economist warns

Investing.com -- Gold’s record-breaking rally could soon unravel, according to John Higgins, Chief Markets Economist at Capital Economics, who warned that the metal’s price has surged far beyond its “fair” value and may now be in bubble territory.

Higgins argues that gold’s price has outpaced not only inflation but also its historical 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 in a note.

“But now, the real price of gold is nearly 60% higher than that peak, and more than three times its average since 1980.”

While gold’s long-term role as a store of value is undisputed, Higgins said the latest surge can’t be justified by conventional drivers such as lower real bond yields or 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, noting that the once-tight relationship between Treasury Inflation-Protected Securities (TIPS) yields and gold prices has “broken down in recent years.”

He dismissed the idea that elevated inflation explains the rally, pointing out that price pressures have eased since their post-pandemic highs. “Inflation has been trending down since its post-pandemic peak, even if it remains higher than the Fed would like,” he wrote.

Speculative factors, rather than fundamentals, may now be fueling the boom. Higgins cited potential contributors such as “reserve managers diversifying out of the dollar,” higher ETF allocations, “growing demand from China,” and “the simple fear of missing out.”

Still, he acknowledged that some of these trends may have lasting effects and could help prevent a sharp collapse.

“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 trades near record highs, buoyed by geopolitical tensions, persistent central bank buying, and a wave of retail enthusiasm.

Yet, as Higgins’ analysis suggests, the market’s exuberance may have detached from economic reality — raising the risk that the next major move could be downward.

XAU/USD spot prices are down 1.8% today, falling $77 to trade at $4,283/oz at 09:38 GMT.