By Aaron Brown

Copyright indiatimes

The price of gold just broke a more than four-decade-old record when adjusted for inflation. At these levels, gold has more purchasing power than it did at its January 1980 peak of $850 or $3,524 in current dollars.There are two usual suspects when gold prices go up — fear of inflation and fear of financial repression such as sanctions and capital controls. Both were in full force in January 1980 when the Consumer Price Index rose 13.9% from a year earlier and after President Jimmy Carter had frozen Iranian assets the previous November.Both suspects have alibis in 2025. Gold prices did not trend up or down from the beginning of the pandemic until the end of October 2022. Since then, they have moved steadily higher. Inflation had peaked at 9.1% in June 2022. By October, it was down to 7.7% and falling. The 10-year breakeven rate — loosely speaking, the financial markets’ expectation of average inflation over the next decade — peaked in April of that year at 3.04% and had fallen to 2.51% by the end of October.It’s also hard to blame increased international tensions or US financial high-handedness. Russia had invaded Ukraine for the second time in early 2022, and sanctions quickly followed. Those were old news by October. The Hamas attack on Israel would not happen for a year. There was no major international, political or financial news at the time.Every price is a ratio. If gold is not rising due to problems with the dollar, perhaps the reason is gold is more attractive rather than dollars being less attractive. Holding gold is costly, around 0.5% per year in a gold exchange-traded fund. If you buy physical gold, there are storage and insurance costs. If you roll gold futures, you pay even more.Live EventsMeanwhile, you’re losing the positive real return you could earn on other assets. The easiest way to estimate this is to look at the yield on 10-year US Treasury Inflation-Protected Securities. Currently, TIPS guarantee 1.67% above the inflation rate, so someone holding an ounce of gold in ETF form is giving up 2.17%, or $79 per year, in potential income.Before asking what that $79 a year buys gold investors, let’s look at the imputed value of owning an ounce of gold over time, inflation-adjusted to reflect current dollars.BloombergAlthough the price of gold was going up from the beginning of 2018 until the pandemic struck, the imputed value of holding an ounce of gold was falling and became negative in June 2020. It did not turn positive again until April 2022. During this period, investors demanded to be compensated for holding gold, instead of the usual situation in which they are willing to pay to hold gold. Holding gold, including costs, paid you $9 a year over buying TIPS.One year before gold prices began to increase, gold investors went from demanding $9 a year to hold gold, to being willing to pay a peak $91 a year to hold gold. This was due to TIPS yields rising rather than gold prices going up. But remember, this is an increase in the amount investors are willing to pay to own an ounce of gold, not an increase in the price of gold. What’s strange is through the pandemic, the Russian invasion and the inflation scare during the Biden administration, investors wanted to be paid to hold gold, and when things settled down, they reverted to being willing to pay to hold the precious metal.We see that other hedges against US inflation and financial repression risk such as the Swiss franc and Bitcoin exhibited the same pattern. They showed little trend when inflation was highest, politics most uncertain and the international situation most dangerous; then rapid appreciation once the dangers seemed to be receding.What if gold is the magician’s right hand misdirecting attention from her left hand — the attractiveness of holding major portfolio investments such as the S&P 500 Index? The chart below shows the cyclically adjusted earnings yield for the S&P 500 minus the TIPS yield on an amount of stocks equal in price to an ounce of gold. The scale is inverted to be comparable to the accompanying chart for gold. At the top of the chart, investors are willing to pay a lot to hold gold, and accept only a little to hold stocks; at the bottom of the chart, investors want to be paid a lot to hold either gold or stocks.BloombergThe two lines look similar. Both were falling pre-Covid, stocks faster than gold. Stocks immediately rebounded when Covid hit (investors demanding more to hold stocks), while gold treaded water until mid-2022. Gold has since overtaken stocks.If investors were afraid of inflation, we should see breakeven yields increase. But they’ve been in a narrow range in 2025 from 2.17% to 2.47%, and 2.37% at the end of last week.Clearly, the main driving force of both S&P 500 and gold prices is changes in the real rate of return, what investors demand to hold safe inflation-protected assets. As that has been falling in 2025, gold investors have not changed the value they put on holding gold much, so the price of gold has soared. If you’re willing to pay $90 a year for whatever benefit you derive from holding an ounce of gold, as real rates fall, you’re willing to pay more for that ounce. In contrast, stock investors have lowered their required rate of real return as TIPS yields have fallen. The S&P 500 has increased, but only 12%.Given there’s no alarm about inflation, big changes in the required real return on stocks, but not gold, suggests fear of recession. To understand markets today, look at TIPS and stocks. Gold may glitter, but glitter can distract the eyes from the fundamentals.Add as a Reliable and Trusted News Source Add Now!
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