Gold has never been more expensive yet nobody knows what it’s worthThe dollar has lost 99pc of its value relative to gold since 1971
Russ Mould
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06 October 2025 6:00am BST
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After a few decades as a daily stockpicking column, Questor returns to its 60-year-old roots by taking a weekly view of the markets – what is moving them, what lies ahead and how all of this could affect your portfolios and financial goals.
It may seem perverse to be looking for the bear case on gold when the precious metal is setting new record highs (38 so far this year) and serving the purpose desired by its adherents – namely wealth protection at a time when the effects of five decades of feckless government borrowing in the West may be finally coming home to roost.
But no less a figure than George Soros says he always reads the counter-arguments to his thesis for a portfolio position far more avidly than anything that could lead to confirmation bias, and investors must always stress-test their investment case for an asset. Falling in love with a holding is a cardinal sin.
There will always be a time to sell and move on because other available options may offer better value and, therefore, long-term potential for superior capital appreciation and total returns.
All that glittersAccording to gold bugs, this era of debt accumulation’s origins lie in President Richard Nixon’s decision in 1971 to withdraw the dollar from the gold standard and smash up the Bretton Woods monetary system. From 1976 onwards the dollar and other currencies were no longer backed by gold and governments no longer bound to the precious metal, with the result they could create fiat currency from thin air if they felt the need.
Since Nixon’s decision, gold has surged from $35 an ounce to $3,870 at the time of writing. Put another way, the dollar has lost 99pc of its value relative to the precious metal since 1971, thanks to inflation, debt accumulation and government and central bank largesse.
Government debts in the US, France and the UK, to name but three, are galloping higher, and there seems to be little public or political appetite for the spending cuts or tax rises needed to tackle the soaring interest bills.
History shows that the options available to reduce the debt – and salt down borrowing-to-GDP ratios – are economic growth, default, start a war or inflate the debt away using a series of financially repressive tools such as quantitative easing (QE) and control of interest rates and government bond yields.
Growth is the best option but the hardest to achieve. Investors can choose for themselves which path they believe our leaders will take.
Austerity or a reassertion of central bank control over policy and inflation would perhaps weaken the case for including gold in portfolios, as would a cooling of global geopolitical temperatures. The inflationary path, alongside more borrowing, takes portfolio-builders back to the bull case for gold.
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Price and performanceBut valuation, not narrative, is the ultimate arbiter of investment return, and deciding what is fair value for the metal is hard for several reasons. For starters, it is chemically inert, has little industrial use and generates no cash or yield.
This is Warren Buffett’s case against the metal and one that argues gold’s intrinsic value is no more than the cost of producing it, which in 2024 was somewhere around $1,500 an ounce across the bulk of the major miners, whose shares are listed on exchanges such as London, New York, Toronto or Sydney. The all-in sustained cost (AISC) of production can therefore be seen as a potential floor for gold.
One fund manager provided this column with a counter to that viewpoint this week by highlighting a chart which shows the gold price as a percentage of average annual US household disposable income.
When gold peaked north of $800 an ounce at the end of the inflation-wracked, war-torn and oil-price-shocked 1970s, that figure was nearer to 9.5pc. Right now, an ounce of gold represents less than 6pc, which suggests gold could hit $6,000 an ounce before it becomes too expensive for the average (American) pocket, should history repeat itself.
Real assetsIn sum, one calculation suggests there may be 60pc-plus upside against downside of some 40pc, to suggest – in certain economic and political scenarios – gold could perform for a while yet.
Any resolution to the US-China trade tensions, return to hair-shirt economics and lasting peace deals in the Middle East could render such mathematics null and void, but the spectres of debt, inflation and financial repression may still lead some investors to seek out assets where supply growth is limited, and much less than that of paper promises, such as government bonds or government-issued cash.
In this context, it may be no coincidence that the CRB Commodities index stands at 14-year highs. Yet this benchmark, which tracks 19 raw materials across energy, agriculture and industrial and precious metals, still trades some 20pc lower than its 2008 peak, which may suggest some of its constituents look cheap relative to gold, most notably oil and gas. But that is a story for another day. |
