• Gold’s surge above US$4,000 has reignited a familiar question: does this mark a new structural era or another cyclical overshoot? 
• The metal’s inflation-adjusted price now sits near historic extremes, a level that in past cycles has been followed by weaker real returns.
• Structural forces, including financialization through ETFs, central bank diversification, and BRICS-led de-dollarization (the efforts by the BRICS nations, Brazil, Russia, India, China, South Africa and some other countries, to reduce their reliance on the U.S. dollar in international trade and finance are reinforcing short-term demand but not necessarily changing long-term valuation anchors.
• For investors, gold remains a credible hedge within a diversified portfolio, but at these levels it increasingly resembles expensive insurance rather than a source of sustainable return.  

A high-altitude view  

A previous commentary examined how policy uncertainty, central bank accumulation and investor exuberance pushed gold to record nominal highs. Let’s take a look at why gold rose and whether such levels are sustainable.

On an inflation-adjusted basis, the real price of gold is now near all-time highs, comparable to the peaks of 1980, 2011 and 2020. In each of those periods, gold’s subsequent ten-year real returns were low or negative. Historically, high real gold prices have signalled diminished future purchasing-power protection, a pattern that Erb and Harvey first coined as the “golden dilemma.”  

What is driving the ascent  

Several medium-term forces continue to sustain demand. Over the past fifteen years, gold’s financialization through exchange-traded funds (ETFs), digital proxies and gold-backed stablecoins has changed the structure of ownership. ETFs have become a dominant vehicle for both institutional and retail investors. Shares and iShares Gold Trust, two of the largest funds, SPDR Gold Shares and iShares Gold Trust, has shown a strong correlation with real gold prices since their launch.

Recent research by Erb, Harvey, and Viskanta (2020) ⁱ finds that ETF ownership now explains almost 90% of the variation in the real price of gold since 2004, underscoring how financialization has amplified market moves. This dynamic has created what the authors call “massive passives”, large, price-insensitive investors whose flows can inflate real prices beyond fundamentals and potentially sustain periods of irrational exuberance.

In parallel, central bank and sovereign purchases have accelerated, particularly across emerging markets. China’s official holdings have risen by roughly 15% since 2022 ⁱⁱ as part of a broader effort to reduce exposure to the U.S. dollar. This process of de-dollarization, while gradual, has added a new source of price-insensitive demand even as traditional ETF inflows have moderated.

Interestingly, new data show ⁱⁱⁱ that this once-stable relationship between ETF flows and gold prices, which held with more than 90 percent correlation through 2022, has broken down since 2023. The recent divergence suggests that newer structural forces, such as central-bank accumulation, de-dollarization and emerging regulatory shifts are now driving demand more than traditional investor flows.

Yet these tailwinds coexist with the same structural constraints that have historically limited gold’s upside. Global mine production remains steady near 3,300 tonnes annually, meaning any incremental demand must be cleared through higher prices. With physical supply largely inelastic, sentiment and policy shifts play an outsized role in near-term pricing.  

The golden dilemma revisited  

The concept of the “golden constant,” first articulated by Roy Jastram in 1978 and later expanded by Erb and Harvey, holds that gold’s purchasing power tends to revert to a long-run mean. In modern data, this is evident in the relationship between the real price of gold and subsequent real returns. When the real price is high, as it is today, future real returns tend to be low.

The current real price of gold, after adjusting for inflation, stands near record highs relative to its long-term purchasing-power average. Based on data from Erb and Harvey, gold is trading at roughly seven times its long-run real price, a level they describe as “very high by historical  standards.” In 1982-dollar terms ^iv and using the current nominal price of gold at US$4030, this equates to roughly US $1,200 per ounce today, compared with an average nominal price of about US $375 in 1982. While the precise ratio depends on the time period used, the conclusion is consistent: gold is exceptionally expensive in real terms, and historically, such extremes have preceded low or negative real returns in the decade that follows.

Additional evidence from Erb, Harvey, and Viskanta (2020) ^v reinforces this conclusion. Following the real-price peaks of 1980 and 2011, gold’s nominal price declined 55% and 28%, while its real price fell 65% and 33% respectively. The authors note that today’s real price sits at a similarly elevated level, suggesting that gold once again represents an expensive inflation hedge with a low prospective real return.

Recent studies ^vi by Campbell Harvey and Claude Erb also show that the real price of gold behaves much like a valuation multiple in equities, where very high levels often precede subdued forward performance. The current environment therefore implies that while gold’s role as a diversifier remains valid, its prospective returns may be modest compared to prior cycles when real prices were lower.

This does not negate gold’s diversification benefits. Rather, it places them in context. Gold’s long-term correlation with global equities remains close to zero, but the metal’s volatility rivals that of the equity market itself. The historical record shows that gold can offer protection during severe drawdowns but may lag in stable or reflationary phases.  

Insurance or illusion?  

Gold’s reputation as an inflation hedge has always been more myth than mechanism. While it provided meaningful protection during the 1970s, its performance in subsequent inflationary periods has been uneven. Over shorter horizons, the mismatch between the low volatility of inflation (~2%) and the high volatility of gold prices (~15%) may make it an unreliable hedge.

Gold’s effectiveness as an equity hedge is also inconsistent.  Our analysis shows that gold protects against equity declines roughly 21% of the time, provides no protection 16% of the time, rises alongside equities 30% of the time and falls when equities rise  in about one-third of the observations. These results suggest that while gold can act as a crisis hedge, its relationship with equities is situational rather than systematic. It may protect during periods of market stress, but it can’t be relied upon to consistently offset equity risk.

Over the long run, gold’s average correlation with equities is close to zero. While that correlation has risen somewhat over the past 25 years, it remains low, less than 10% today. This weak relationship qualifies gold as one of several assets and strategies that can help cushion portfolios during market drawdowns, inflationary episodes and recessions. However, from my perspective, gold shouldn’t be the sole component of this protective sleeve. Diversified commodity portfolios, inflation-protected bonds and positive-convexity strategies such as long put options and trend-following approaches may offer complementary forms of downside protection.

Instead, gold’s appeal lies in its optionality, a form of insurance against policy error, geopolitical disruption or systemic loss of confidence. But, as with any insurance, the cost matters. At current real prices, gold’s insurance premium is steep. Its expected real return over the next decade is likely to be modest, if not negative, if historical relationships hold. Gold is best viewed as expensive insurance, valuable during periods of stress but costly over full cycles.    

Positioning for investors

For multi-asset investors, the challenge is balancing gold’s protective qualities against its valuation risk. In my opinion, at these levels, strategic exposure should be modest and deliberate, sized to offset tail-risk scenarios rather than to generate return. Tactical flexibility remains essential. Gold can still play a role in a diversified portfolio alongside inflation-linked bonds, managed-futures strategies and other diversifiers that respond differently to shifts in real yields and policy uncertainty.

The recent outperformance of gold miners, up roughly 120% year-to-date ^vii , reinforces this caution. Their leveraged sensitivity to the gold price amplifies both upside and downside, and historically, such surges have tended to fade once spot prices plateau.  

Concluding thoughts

The surge above US $4,000 has reawakened the timeless question of whether gold’s rise marks a structural revaluation or another cyclical peak. History suggests that this time is rarely different.

Financial innovation, de-dollarization and fiscal strain have undoubtedly altered the contours of demand, but they haven’t repealed the golden constant. High real prices have historically invited lower future returns.

A potential wild card lies in future regulatory treatment. If gold were to qualify as a Tier 1 high-quality liquid asset under Basel III, commercial banks could hold it to meet liquidity-coverage requirements. Erb and Harvey estimate ^viii that such a change could create a demand shock comparable to the one that followed the launch of gold ETFs in 2004, temporarily supporting prices even at elevated real valuations.

Gold’s role as a store of value endures, but at current levels, it functions less as a source of return and more as a symbol of uncertainty. Investors should treat it as a tool for resilience, not as a prediction of prosperity.    

Corrado Tiralongo (he/him)  
Vice President, Asset Allocation & Chief Investment Officer   
Canada Life Investment Management Ltd.