- Precious metals have been a helpful portfolio diversifier this decade
- Gold is still up by a sixth in 2026, and by two-thirds in the past year, despite recent gyrations
- Bears may not shift but bulls can still argue the metal may offer further upside
“America’s stock market embarrassed the economist Irving Fisher when he argued stock prices had reached a ‘permanently high plateau’ in October 1929, just ahead of the crash, and gold’s massive surge and subsequent consolidation in the past year has left buyers of precious metals to wonder what may come next, especially as it has done little during the early stages of the war in the Middle East” says AJ Bell investment director Russ Mould.
“Nothing tends to flat-line after the sort of gains made by gold of late, so the recent pause for breath looks healthy, especially as bulls of the commodity can still offer a valuation case for it.
Source: LSEG Refinitiv data
“That said, sceptics will remain firm in their view that the investment case against gold and precious metals is clear cut. They have little industrial use, certainly in the case of gold, generate no cash and thus rely on the greater fool theory for upside, as holders need new buyers to follow in and buy off them for the price to rise.
“There also remains the risk that the recognised exchanges tinker with the rules if they feel matters are getting out of hand, as COMEX in the USA did earlier this year, when it raised its margin requirements for traders. Even the government could get involved, if it wished, as the Roosevelt administration did with Executive Order 6102 in 1933 that effectively forbade private ownership of any scale.
“Bulls will counter by pointing to ongoing geopolitical risk, a weak dollar and galloping sovereign debts, especially in the West, where the burden is now so great that inflation and monetary debasement may be the only way to render manageable those borrowings and the associated interest bill.
“Those issues prevailed before the war in Iran broke out, and none have become less acute since the start of the conflict.
“Normally, valuation would then help to frame the debate, in terms of what may be priced in and what may not, according to a range of scenarios and their likelihood, to help investors decide whether the potential upside provides sufficient compensation for the potential risks.
“This is more difficult in this instance, because gold and precious metals generate no cash, an issue which comes back to why master investor Warren Buffett had no interest in them at all.
“In the absence of multiples of earnings or a full-blown discounted cash flow (DCF) model, an alternative approach is needed. This can focus on the affordability of gold for would-be buyers, or a study of what it helps holders to buy, to provide a framework of relative, rather than absolute, valuation.
“One approach is to look at how the gold price compares to annual disposable income. When gold peaked at $835 an ounce in January 1980, it reached 9.4% of the annual US household’s available annual discretionary spending. Gold currently stands at 7.2% of that figure, and a return to the former high points to a gold price of some $6,500 an ounce, or a third above current levels. Asset and wage inflation (or deflation) could shape this calculation going forward.
Source: Jefferies, FRED - St. Louis Federal Reserve, LSEG Refinitiv data
“A different technique is to look at gold’s purchasing power, relative to the most important buy anyone makes – a house. A would-be buyer of the average US dwelling would currently need just 89 ounces of gold to cover the cost. This compares to the figure of 78 reached when gold peaked in January 1980. A repeat of that would take gold up by a sixth to around $5,750, again before adjusting for any future increases (or decreases) in US house prices.
Source: Palm Valley Capital, FRED - St. Louis Federal Reserve, LSEG Refinitiv data
“One further test is to look at the value of gold relative to US money supply. This perspective rests on the debasement trade, whereby bulls of gold assert that governments will print or rely on inflation to make their debts, and spending programmes, affordable, rather than turn to austerity or higher taxes.
Source: Myrmikan Research, FRED - St. Louis Federal Reserve, LSEG Refinitiv data
“Here the conclusion is that gold is way below past peaks relative to the M2 measure of money supply in the US. A return to the 1980 high would take gold above $12,600 an ounce, although it is worth bearing in mind, in this case and the other two, that gold did not hold that zenith for long at all forty-six years ago.
“A final wrinkle is to look at gold relative to oil, at a time when the value, and use of, crude is again in the spotlight thanks to the war in the Middle East.
“Since 1970, one ounce of gold has, on average, bought 18 barrels of oil. That figure reached nearly 80 earlier this year, when gold set new all-time highs, to suggest that crude was cheap relative to the precious metal.
Source: LSEG Refinitiv data.
“Oil’s sharp gains mean one ounce of gold now buys nearly 49 barrels of oil. That is a big pullback from the high but still suggests crude may offer the better relative value, especially if the conflict lasts longer than financial markets hope or expect.”
