Has the gold rush gone too far?

The precious metal is up 38% over the last 12 months amid geopolitical tensions and global economic uncertainty

The Bank of America has predicted that gold will hit $3,000 in 2025. Reuters

The gold price is having a moment as the world’s oldest safe haven and store of value smashes past one record high after another. It’s giving goldbugs the ride of their lives, hitting an all-time high of $2,790.15 an ounce on October 31, before dipping slightly afterwards.

The precious metal is up 38.16 per cent over the last 12 months, but this isn’t a flash in the pan. Over five years, it's up 81.86 per cent and a blockbuster 547.52 per cent over 20 years. That would have turned a $10,000 investment into a stunning $64,752.

That's a dazzling return, if not quite Bitcoin-dazzling. There’s also a risk the rally could get out of hand, as fear of missing out kicks in with the Bank of America predicting gold will hit $3,000 in 2025, and some traders even more bullish. How long can this go on?

Gold is in demand for the age-old reason that investors are looking for a reliable hedge against geopolitical tensions and global economic uncertainty, says Mohamed Hashad, chief market strategist at Noor Capital.

“Gold offers security at a time of moderate economic growth, ongoing inflationary pressures and volatile markets.” Emerging market consumers are also loading up on gold "to give them security outside of the traditional financial systems”, Mr Hashad adds.

Central bankers have pitched in, too, as China and others seek to diversify their reserves and wean themselves off dollar-denominated assets such as US government bonds. Latest figures from the World Gold Council show sales have slowed, with August's figure the lowest since March, but they’re still high. The National Bank of Poland, the Central Bank of the Republic of Turkey and the Reserve Bank of India were the biggest buyers.

Gold has one big disadvantage for investors. It doesn't pay any interest. It should, therefore, suffer when interest rates are high, because investors can secure higher yields from rival boltholes such as cash and bonds.

The recent gold spike reflects expectations that the US Federal Reserve will follow September’s rate cut with two more before Christmas, Mr Hashad says. “If that happens, demand for non-yielding assets like gold should rise, especially as the US dollar’s value fluctuates.”

Yet Mr Hashad says buyers should approach with caution. “Those entering the market now could face losses if demand slows or conditions become more stable, reducing gold’s role as a safe haven.”

Suspicions that the Fed may be forced to hold interest rates higher for longer have pushed up bond yields and the US dollar in recent days. Carsten Menke, head of next generation research at Julius Baer, says it’s unusual to see precious metal prices rally at the same time as the US dollar strengthens.

Gold is priced in dollars, so a stronger greenback makes it more expensive for buyers in countries with other currencies, which would normally hit demand and the price. The fact gold is still rising suggests investors are “in crisis mode”, Mr Menke says. “For gold, this is something that typically only happens in times of extreme economic or systemic stress, say during the financial crisis or eurozone crisis.”

The knife-edge US presidential election is adding fuel to the fire, he adds. Mr Menke says there is a "high conviction among large institutional investors" that the backdrop for gold will be bullish no matter who makes it to the White House. “This is based on the belief that US fiscal deficits are set to remain large, which should weigh on the dollar and may potentially undermine its role as the world’s reserve currency.”

Mr Menke also suggested there is a “bullish wildcard” working in favour of gold, the risk of public unrest after an inconclusive election result on November 5, which he says “seems more likely in case of a Harris win than a Trump win”.

Investors should remain cool as the market hots up. Mr Menke adds: “Today’s extreme euphoria makes gold and silver susceptible to a short-term setback. However, this will likely be treated as a longer-term buying opportunity.”

Ole Hansen, head of commodities strategy at Saxo Bank, takes a different view. “I see no sign of extreme euphoria, simply a metal that has rallied as investors seek protection against multiple uncertainties in an unsettled world.”

He lists these risks as “fiscal instability, geopolitical tensions, de-dollarisation, the US election and Chinese investors turning to gold amid record-low savings rates and property market worries”. While some worry that we won’t get a clear US presidential winner on November 5, Mr Hansen says others are concerned by a potential “red sweep” in which the Republicans win control both of the White House and Congress.

“This raises concerns about excessive government spending, which would push the debt-to-GDP ratio higher while fuelling inflation fears through tariffs on imports and geopolitical risks. Investors are turning to precious metals as protection.”

Yet Mr Hansen also warns investors that “nothing ever goes in a straight line”, and gold could still correct at some point. Any dip could be a buying opportunity, as today's risks aren't going to suddenly disappear and “the prospect for even higher prices remains”, he adds.

Gold is doing what it always does in uncertain times, says Tony Hallside, chief executive of Dubai-based advisers and brokers STP Partners. “With heightened geopolitical risks spanning the Middle East, Europe and the US, investors are turning to gold as a counterweight to volatility in other asset classes.”

While the gold price may fluctuate in the short term, Mr Hallside believes the broader trajectory is resilient. “Gold could realistically test levels approaching $2,800 if economic and geopolitical tensions remain high. This resilience is bolstered by persistent inflation, which supports gold’s status as a hedge against currency depreciation, especially as other safe-haven assets remain tethered to central bank policies.”

The precious metal has lost none of its lustre, Mr Hallside adds. “Gold remains a compelling choice for those seeking stability amid an unpredictable economic backdrop.”

Today it is suffering a strange kind of euphoria, one built on fear rather than greed. Gold is also a strange kind of safe haven, as the price can be highly volatile, which means investors’ capital is at risk. After spiking in 1979 following the Iranian revolution and Russia's invasion of Afghanistan, the gold price crashed and didn’t recover for two decades.

That seems highly unlikely today, but nobody can say for sure. And that’s why people hold gold. As a hedge against the fact that nobody knows what's going to happen next.