John Higgins, chief market economist at Capital Economics, said gold’s record rally may soon fade. He noted that gold prices have far exceeded their “fair” value and may now be entering bubble territory.
Higgins believes that gold prices have outpaced not only inflation but also their historical relationship with other real assets.
“In early 2025, gold prices were near their 1980 peak in real terms,” he wrote in a report.
“But now, gold’s real price is nearly 60% above that peak and more than three times its average since 1980.”
While gold’s long-standing role as a store of value is undeniable, Higgins said the recent surge can’t be explained by traditional drivers, such as low real bond yields or high inflation.
“Because gold doesn’t pay interest, the opportunity cost of holding gold falls when yields on such bonds fall. But these yields have generally been rising,” he said, noting that the once-strong correlation between yields on Treasury Inflation-Protected Securities (TIPS) and gold prices “has broken down in recent years.”
He dismissed the idea that high inflation explains gold’s rise, noting that price pressures have eased since its post-pandemic peak. “While inflation remains above the Fed’s expectations, it has been trending downward since its post-pandemic peak,” he wrote.
The gold boom may be driven by speculation rather than fundamentals. Higgins cited potential factors such as “diversification of reserve managers into the US dollar,” “increasing allocations to ETFs,” “growing Chinese demand,” and “simple missed opportunities.”
However, he acknowledged that some of these trends could have lasting effects and help prevent a sharp decline in gold prices.
“Some of these factors may be ‘structural’ and therefore continue to support gold prices,” he said. “But the likelihood that the gold bubble is about to burst is also increasing.”
The warning comes as gold prices near all-time highs, driven by geopolitical tensions, continued central bank gold buying, and retail investor enthusiasm.
However, as Higgins’ analysis suggests, the market’s exuberance may have become detached from economic reality, increasing the risk that the next major move could be to the downside.
