Golden times

Gold has held a fascination for humanity since time immemorial. In ancient Greek mythology, King Midas turned everything he touched into the yellow precious metal. Later on, the fabled golden city of El Dorado enticed Spaniards to set sail across the ocean, driven by dreams of unfathomable wealth. Another gold rush is underway today, but its causes are different than they were in previous centuries, and it has recently become a bit overheated.

What sort of asset is gold actually…

Gold plays a special role in the investment universe and defies any clear-cut classification. Is it a commodity, a currency, or more of a collector’s item? The fact is that gold fulfills a variety of functions without completely taking over a single specific one. It is too close to being a commodity to be considered a currency, is too similar to a currency to be a conventional commodity, and at the same time is too unproductive to be deemed a traditional asset. That’s because unlike stocks or real estate, gold does not generate any ongoing cash flows – neither dividends nor rent income. Without those revenue streams, a classic valuation basis is missing. Consequently, gold cannot be intrinsically valued. Its price is particularly a reflection of investors’ moods and passions and of gold’s limited supply. Since gold is an unproductive asset, some investors – including Warren Buffett – eschew the metal altogether and prefer to invest in assets that generate a cash flow. Yet, even the “Oracle of Omaha” had to stand back and watch in 2025 as gold broke one price record after another without paying any dividends at all.

Historic rocket flight | The gold rally in numbers

Evolution of gold price in USD per ounce since 2016

Sources: Bloomberg, Kaiser Partner Privatbank

…and what factors affect the price of gold?

If gold itself doesn’t yield any ongoing income returns, what then drives demand for the metal? Although many factors affect demand for gold, three main drivers stand out historically:

• Inflation: Gold acts as a store of value and as a protective shield against currency debasement, particularly in times of unexpectedly high inflation or hyperinflation. Investors flee into gold when confidence in paper currencies fades.
• Crisis fears: Since time immemorial, gold has been considered a safe haven in stormy times. Demand for the precious metal often increases during wars and political crises, which haven’t been in short supply in recent years.
• Real interest rates: The attractiveness of gold classically correlates inversely with real yields. When real yields rise substantially, the opportunity cost of holding the non-interest-bearing metal increases, putting downward pressure on the price of gold. Conversely, low or even negative real interest rates fuel demand for gold, or at least so goes the textbook logic. In recent years, though, this correlation has lost explanatory power as rising real interest rates have been accompanied periodically by a rising price of gold.

Structural changes as key drivers

Besides classical price and interest-rate factors, structural and geopolitical factors have also been gaining increasing importance and may have shifted the “new normal” for the price of gold upward. One of the core drivers is central banks. Ever since the Great Financial Crisis and even more so since 2018, central banks mainly in emerging-market countries have been amassing more and more gold, often at the expense of the US dollar. In a world of mounting geopolitical tensions and growing doubts about the dominance of the dollar and the US Federal Reserve’s autonomy, the governments of many countries are banking on politically neutral gold free from economic sanctions and dependencies. The immense buying undertaken by the People’s Bank of China (PBoC) to build up a strategic national reserve of the precious metal is particularly relevant. China’s national gold reserves may be even larger than the PBoC’s official data suggests.

Quietly but steadily | Central banks as furtive bulls

Average percentage of gold in total official central-bank currency reserves

Sources: World Gold Council, Kaiser Partner Privatbank

Structural private demand for gold in Asia shows a similar pattern. Households in India, for example, hold a total of around 25,000 tons of gold, which equates to approximately 16% of total private household wealth in that country. Gold’s hedge effect against global uncertainty reduces buyers’ sensitivity to price changes and stabilizes demand. This, coupled with strong nominal growth and the cultural significance of gold jewelry, which is increasingly being used also in China as a liquid investment alternative to slumping real estate, makes Asian demand a gold-price driver not to be underestimated.

Add to that the democratization of access to gold. Whereas physical bullion bars, storage fees, and safe-deposit boxes used to make it cumbersome to enter the gold market, today it takes only a few mouse clicks to acquire the yellow metal. Gold ETFs have given the general public a way to invest savings inexpensively and liquidly in the precious metal since the early 2000s, which has resulted in substantial capital inflows into gold, especially during times of elevated uncertainty.

From bars to bytes | Gold investment in the age of ETFs

Collective gold ETF holdings in tons

Sources: World Gold Council, Kaiser Partner Privatbank

Is gold overvalued at present?

The soaring price of gold has raised a question in the meantime even among seasoned Wall Street pros, who are asking themselves if the yellow metal is already overheated. A frequently used long-term valuation anchor looks at the price of gold in relation to the global money supply because gold has historically been considered a store of monetary value and cannot be multiplied at will. While the two variables often track together over long periods, in recent years the price of gold has risen much more sharply than the money supply. A comparison of gold with petroleum also points to an overvaluation: one ounce of gold buys around 70 barrels of crude oil today, up from an average of just 17 barrels over the last 50 years. In addition, the price of gold is currently 3 to 3.5 times higher than the cost of mining bullion. The cost of producing gold has increased in recent years, but has risen much more slowly than the price of gold has. The signs at first glance are indicative of an ambitious gold valuation at present. It should be noted, though, that the valuation metrics cited above do not represent specific models for verifying the correct price of gold, but instead act more as signals indicating an extraordinarily high price premium.

Natural price floor | The cost of mining gold

Gold price and all-in sustaining mining cost in USD per ounce

Sources: Bloomberg, World Gold Council, Kaiser Partner Privatbank

Gold in a portfolio: Insurance, an illusion, or both?

People hold gold for a variety of reasons. Whereas short-term-oriented traders bet on price movements while others view gold as a core investment to hedge against tail events like currency reforms, hyperinflation, or a financial collapse, most investors hold gold mainly for its diversifying effect. Recent years have shown that simultaneous price declines in stocks and bonds are possible. Gold can act as a valuable diversifier in situations of that kind due to its resistance to market volatility, its absence of credit and default risk, and its non-correlation with most other types of assets. However, it turns out that a golden finger in the dike is not enough. A double-digit percent weighting of gold in a portfolio would be necessary to obtain an appreciable insurance effect, but even then, there is no guarantee. The benefit of gold gets put into perspective at the portfolio level: analyses of defensive strategies show that the performance differential between portfolios with and without gold during crises amounts to just 20 basis points. Gold is thus neither a reliable driver of returns nor a magic charm against market turbulence.

Upshot for investors

Gold is not a silver bullet. Even if its sparkling performance over the past year may arouse a temptation to jump with both feet on the bandwagon, it’s important to take a soberly realistic view. FOMO – the fear of missing out on something – is never a good investment advisor. Anyone who bought into gold for the first time in late January had to bitterly acknowledge that. It definitely makes sense from a strategic perspective to moderately blend gold into a portfolio. But it all comes down to the right dosage: anyone already holding gold should examine what function it serves in his or her portfolio and should check if its weighting meets his or her return and risk objectives. On the heels of the stellar price gains in 2025, it may make sense to undertake a rebalancing, particularly if gold has substantially outgrown its assigned weight in a portfolio’s strategic target asset allocation.