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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Good morning. Tech earnings season begins in earnest tomorrow, with a cool $7tn in market cap reporting in the form of Microsoft, Meta, Tesla and ASML. Predictions, please: unhedged@ft.com.
Gold
Unhedged has been loudly, persistently and hilariously wrong about gold. If there is a world record for financial pundit wrongness, we must be getting close to it. We hated this asset at $2,500, and it just flew past $5,000. Under circumstances like these, rational people generally change their mind. We are trying to, and finding it a challenge.
To reiterate our big sticking point, we can’t make sense of the most popular justifications for gold’s wild ride: the idea that the debasement of financial assets or heightened political uncertainty makes gold an irreplaceable diversifier or hedge.
The problem with the debasement argument is if there were a heightened risk of a collapsing dollar or higher inflation, you would expect that to show up somewhere in the currency or fixed-income markets. And it has not shown up at all. People huff and puff about the weak dollar, but zooming out, it is clear there has been no break in the historical pattern:
And there is no sign whatsoever of long-term inflation worries in market-based measures. Here, for example, are implied inflation expectations for the five-year period starting five years from today. They have been asleep for years:
Some will argue that global central banks are moving their reserves away from dollars and into gold, and this is a better measure of debasement than the bond market. Well, central banks cut their gold purchases by more than a third from 2024 to 2025, according to the World Gold Council, bringing their purchases back into the historically normal range:
A better place to look for incremental buyers is ordinary investors purchasing gold ETF shares. Below is a chart of the gold prices along with monthly ETF gold purchase volumes. It suggests that investor demand, not sovereign rebalancing, is the source of incremental growth:
On the political side, it is true that gold has long had at least a loose relationship with political turbulence. This chart, overlaying an index of geopolitical risk with the 12 month change in the gold price, comes from James Steel at HSBC. It shows gold price leaps coinciding with various wars:
This is much more convincing than the debasement side of the argument. Gold is not driven by inflation; it is driven by fear. We can see this by the fact that it often trails inflation for long periods, but consistently outperforms at those moments when markets are at their very worst. But is the world really much, much scarier today than it was, say, in the years after September 11 2001? It’s a subjective question. But note that in the two years following the 9/11 attacks, gold rose by 28 per cent. In the past two years, gold is up 145 per cent.
Making matters worse for investors, the gold price has had just two other jumps similar to today’s in the past 50 years, in 1979-80 and in 2011-12. In retrospect, they were both clearly bubbles and absolutely disastrous times to buy gold. Below is the gold price adjusted for US CPI inflation:
What makes the current case feel even bubblier is that silver, an asset with an even worse history of bubbles and busts, has shown up to the party in a huge way. Again, this chart of silver is inflation-adjusted:
All of this is pretty damning for a fundamental, as opposed to speculative, reading of the gold rally. But, again, we’ve been saying this for a long time, and the gold price is telling us we might be missing something. What might it be?
James Athey of Marlborough Group makes the case that the disconnect between the gold price and bond and currency markets is a result of the government anaesthetising those markets:
Bond yields are suppressed! In spite of QT [ending] it is still overwhelmingly the case that bond yields are lower than they would be in a hypothetical world of no central banks (Fed, Bank of Japan, Bank of England, Swiss National Bank balance sheets are all still gargantuan). That fact is probably (in my opinion) the single biggest reason for the apparent disconnect — the actions which authorities (both fiscal and monetary) have taken to prevent bond yields rising inexorably are de facto reasons to sell those same currencies. In a world where all authorities globally are all playing this same game its hard to profit in FX — selling the bad ones to buy the good ones leaves a very long list of the former and a very very short list of the latter and the cyclical gyrations make a lot of trades hard to hold. Gold is the unequivocal winner in such a game.
There is another way to think about the political risk argument, too. Consider this chart of the gold price relative to the value of the S&P 500:
Relative to the most important class of risk assets in the world — big US stocks — gold does not look expensive at all relative to history. And you might tell a story, based on that chart, about why the gold price can go up further from here. It goes like this: back in the wretched 1970s we all understood that the world was a pretty nasty place, where you could only put so much trust in, say, a piece of paper from a company promising you could participate in its future profits. You needed something convertible anywhere, something that you could stick in your pocket and make a run for it. Since then, we have had a long period of ultimately unsustainable optimism, during which most of us liked the promises written on the little pieces of paper much more than the solid stuff. This optimism was briefly interrupted by 9/11 and the great financial crisis. But now we are realising nasty events like those are not the exception; they are the rule. And so gold is coming back.
Summing up: to rationalise the gold rally, you have to believe that the bond market is lying to you, that the world is becoming a much worse place than any time in the past 50 years, or both. When Unhedged becomes convinced of either, we’ll change our mind on gold.
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