Gold’s glitter fades: biggest one-day drop since 2013
While bubble definitions abound, most fall into two camps: those that measure overvaluation and those that observe the behaviours and conditions that typically give rise to it.
The most straightforward definition of a bubble is asset prices climbing far above some measure of value, such as earnings, dividends, gross-value-added (GVA) or discounted cash flows. Robert Shiller’s famous CAPE ratio, which compares stock prices to long-term average earnings, and John Hussman’s market-cap-to-GVA, were designed to flag these distortions.
But gold cannot be ‘valued’, as it produces no income, no measurable output. It is a bet on fear. We therefore must rely on behavioural aspects to determine whether a bubble is present.
Intuitively, the price of an asset or commodity cannot sustainably move vertically, and historically, many a vertical price move has come to a messy end. Vertical moves that coincide with record inflows of A$1.3 billion into Australian gold exchange traded funds (ETFs) since the start of 2025, and long queues of ‘mum & dad’ buyers outside bullion retailers, may be the best indications we have of gold entering a bubble phase.
Figure 1. Record gold price inspire record queues
Source: Trading Economics, Montgomery Investment Management
A messy end?
After months of relentless and accelerating gains and record-setting highs, gold’s gravity-defying run finally hit the pause button this week. On Tuesday, gold futures in the U.S. tumbled US$248.70 per troy ounce to close at US$4,087.70/oz, a fall of 5.7 per cent. It was the steepest single-session drop since June 2013 – more than 12 years. Silver and platinum were similarly sold off. Silver fell 7.2 per cent to US$47.45/oz and platinum shed 8 per cent. While steep rises in gold have frequently been followed by plunges in the past, for newly minted (pun intended) gold traders used to its slow and steady climbs, the speed of the fall this week would have been a shock.
Too soon to tell.
The truth is nobody knows what the gold price is going to do next.
What we can predict is some experts will emerge with predictions that, ‘the latest sell-off represents a short-term correction rather than the end of the bull cycle’, or, ‘gold’s structural case remains strong despite an overnight correction’, and, ‘we don’t believe this marks the beginning of a serious correction – rather, it’s a healthy pullback’.
Of course, they have no basis on which to make those forecasts, but they will offer some comfort to the many thousands who have lined up to buy physical gold for the first time.
Gold remains up roughly 55 per cent year-to-date, and nothing goes up in straight line. And perhaps encouragingly, U.S. monetary and fiscal as well as global geopolitical policy uncertainty, low real yields, and global central bank buying are currently expected to continue to support gold prices.
More recently, the August rally accelerated when U.S. Federal Reserve Chair Jerome Powell “pivoted” at Jackson Hole, shifting from fighting inflation toward supporting jobs with the promise of lower interest rates. The hint of easing monetary policy ignited buying across speculative assets from gold to high-beta tech stocks.
Conversely, however, hopes for thawing global trade tensions – spurred by the U.S. and Australia inking a new rare-earths trade agreement, and talk of progress toward a broader U.S.–China deal – could arguably reverse demand for gold as a “safe-haven” hedge. And a return to Quantitative Easing (QE) by the U.S. Federal Reserve could have a similar impact.
Echoing past bubbles
The magnitude of gold’s move lower, of course, has revived questions about whether it has once again succumbed to the effects of bubble-inspiring speculative excesses.
Gold’s 2024/25 run is its third major breakout in the last 50 years – after similar rallies in 1979-80 and 2010-11. Both of those, however, ended painfully and were followed by so-called ‘lost decade(s)’ that relegated gold ‘investing’ to trench-coated gold ‘bugs’.
During the 1979-80 and 2010-11 periods, investors were gripped by fears the Federal Reserve would let inflation erode the U.S. dollar’s value. And on both occasions, those fears proved misplaced. In the early 1980s, Paul Volcker’s Fed sacrificed growth to crush inflation, sending gold into a two-decade bear market. And after the 2011 high, gold languished for five years.
So far, today’s parallels are undeniable. Gold’s share of global investable assets has jumped from 4 per cent to 6 per cent in two years – its highest since 1986, according to Goldman Sachs – echoing the speculative concentrations seen at past peaks.
This time is different – again!
The long-term case for gold is the so-called “debasement” or “dedollarisation trade”. That’s the view that heavily indebted governments will eventually choose inflation over fiscal restraint to reduce their debt burdens. The argument has also been bolstered by Western sanctions that froze Russia’s foreign reserves in 2022, prompting many emerging-market central banks to seek insulation from U.S. dollar hegemony.
The question is, what price does one pay for that insurance? Paying a high price for even a very high-quality company can result in poor future returns. The same must also be true if one pays too much for gold – even if the investment thesis is right.
Nobody can tell if the underlying risk in the world has truly changed or whether gold buyers are just chasing momentum inspired by fear of missing out (FOMO). When investors buy merely because prices are rising, rather than because fundamentals justify it, the corrections are inevitably brutal.
What’s next?
It’s worth keeping in mind, Tuesday’s sell-off only takes gold back to its level less than two weeks ago. No rally is ever smooth and many will argue the commodity’s uptrend remains intact. With real yields still low, sovereign debt burdens high, and policy credibility strained in Europe and the U.S, the arguments that spurred many to buy gold in the first place remain alive.
Whether this week’s move proves to be the start of another multi-year consolidation or merely a short-term shake-out in a trend that takes gold thousands of dollars higher (as some predict) might depend on whether the world’s central bankers can convince investors that inflation is under control. It might also depend on whether geopolitical tensions ease.
Throughout history, every great bull market has had days like this, and every bear market started with a sell-off. I’ll leave you to decide which prediction is right.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
