Are those avoiding the stock market bubble blowing up a gold bubble?

Gold prices are hitting new highs repeatedly, with funds pouring in, and gold is transitioning from a "safe-haven asset" to a "speculative darling." However, the shadow of a bubble is beginning to emerge beneath the shiny surface.

Spot gold has surged over 50% this year, breaking through the historical high of $4,200 per ounce on Wednesday. However, according to Reuters columnist Mike Dolan, this seemingly rational safe-haven behavior may be evolving into a dangerous speculative frenzy.

In an article on October 14, Mike Dolan pointed out that the peculiarity of this gold bull market lies in the fact that while gold prices continue to rise, U.S. and global stock markets have rebounded significantly since April, and uncertainty indicators have declined. Although concerns over trade and geopolitical risks following Trump's return to the White House reasonably explained the surge in gold demand earlier this year, the rise in gold prices has not slowed down as the stock market has strongly recovered from its lows and market sentiment has stabilized.

Major Wall Street investment banks are still competing to raise their gold price forecasts. Goldman Sachs expects gold prices to rise another 20% by the end of next year, Société Générale believes that a rise in gold prices to $5,000 is "increasingly inevitable," and JP Morgan has listed going long on gold as one of its "strongest cross-asset views," this consistency of expectations is often a typical characteristic of bubbles.

It is worth noting that gold's performance is highly correlated with high-risk assets such as U.S. stocks. Theoretically, gold should strengthen when market risks rise and weaken when risk appetite increases; however, now, both the stock market and gold prices are soaring together, weakening gold's "diversification" function. If the stock market were to plunge for some reason, whether gold could still serve its safe-haven function has become an unresolved question.

Paradox of Safe-Haven Logic?

The article points out that global trade concerns and geopolitical risks may have reasonably explained the strong demand from investors for physical gold as a safe-haven or asset diversification tool during the initial phase after Trump returned to the White House in January.

Global easing of fiscal and monetary policies, including threats to the independence of the Federal Reserve and other central banks, has also exacerbated global inflation concerns, lowering real interest rates, making this zero-yield precious metal appear more attractive.

Moreover, the Trump administration has openly expressed a desire to weaken the dollar, as it believes the dollar is overvalued. However, since mid-year, both economic policy and geopolitical uncertainty indices have declined, yet gold has hardly paused. This disconnect from traditional safe-haven logic is raising market vigilance.

However, according to a report by the American Bank's global commodities team, in the latest precious metals market report, the White House's "non-traditional policy framework" will continue to benefit gold, including expanding fiscal deficits, rising debt, intentions to reduce the current account deficit, and pushing for interest rate cuts in an environment with an inflation rate of about 3%Previously, Bank of America analyst and chief investment strategist Michael Hartnett emphasized that expectations for changes in Federal Reserve policy, government stimulus measures, and a potential gold revaluation (similar to those in 1934 and 1973) will support currency depreciation trades. Based on the average performance of the past four bull markets, gold prices have historically risen by about 300% over 43 months.

Additionally, unlike stock valuations, gold pricing does not have a recognized valuation standard. Gold has doubled in five years and risen over 250% in the past decade, but there is no consensus on when it is considered "overvalued."

Crowded Trades May Signal Contradictions

Dolan stated that, due to the lack of a recognized valuation model, the bullish logic for gold, like other commodities, primarily depends on supply and demand dynamics.

Driving this force is the continued buying of gold by central banks for reserve diversification, as well as the ongoing appeal of gold ETFs and other trading funds—an increasing number of ordinary investors seeking safe havens are looking for more reliable hedging tools than long-term government bonds.

The demand from central banks appears to be structural and stable, so forecasting institutions will still factor it into future models, even if gold prices have already risen due to "anticipated buying." The question is, where will this demand end?

The demand from private investors is more perplexing. According to Bank of America's monthly survey of global asset managers, "going long on gold" was considered the second most crowded trade in September, just behind large U.S. tech stocks.

However, more than one-third of respondents had no allocation to gold at all, and those who did allocate to gold had an average weight of only 4.2%.

The article points out that this contradictory signal is seen as a crowded trade, yet actual allocations are relatively limited, increasing the difficulty of market judgment.

Three Signals to Watch Out For

The parabolic rise of gold is starting to raise concerns, primarily for three reasons: the speed of the increase is too rapid; it is gradually decoupling from market uncertainty indicators; and it is diverging from the trends of real interest rates and the U.S. dollar.

JP Morgan noted that the recent surge in gold has far exceeded the increases typically explained by a decline in one-year real interest rates. Theoretically, when the real returns on other "safe assets" decline, gold becomes more attractive.

JP Morgan believes this "decoupling" can be explained by strong physical demand and suggests that investors buy on dips during short-term corrections caused by interest rate fluctuations.

However, JP Morgan and HSBC also warned: If the market expects the Federal Reserve's terminal rate in this cycle to rise again, gold may face challenges.As inflation expectations continue to rise, the backdrop of last quarter's surge in gold prices is that the market-implied terminal rate of the Federal Reserve has dropped nearly 50 basis points in three months, falling to below 2.9%. However, in recent weeks, this rate has rebounded, boosting the dollar, partly due to unexpected political situations in Japan and France.

Although the escalation of trade tensions last Friday briefly intensified risk aversion, the downward trend in economic policy and geopolitical uncertainty indicators has not been reversed. HSBC stated that if global military or trade tensions ease next year, it could ultimately weigh on gold prices.

Meanwhile, Zhang Yu from Huachuang Securities believes that traditional real interest rates or expectations of rate cuts can no longer explain this round of gains. She innovatively proposed that the core driving force behind gold prices is the market's expectation of a "restructuring" of the global political economy. Coupled with gold's unique low correlation value in global asset allocation, there is a need to open one's imagination and maintain a strategic reverence for gold, as its upward trend may be far from over.

Finally, from a technical indicator perspective, the Deutsche Bank team believes that there may have been signs of a "trend peak" during the period from September to October — their model shows that the deviation of gold prices from the trend has far exceeded historical averages.