76report

April 30, 2025

Understanding the Gold Price

Gold has performed extraordinarily well… but is it sustainable?

The exceptional performance of gold is one of the most important stories of 2025. Gold is up approximately 26% year to date, whereas the S&P 500 Index is down 5%.

And it’s not as if gold had been performing poorly going into this year. Over the past three years, gold has generally tracked the performance of the S&P 500, until handily surpassing it as the new year began.

Gold vs. S&P 500

Total Return (Last 3 Years)

Over the past three years, gold has delivered a total return of 75%, versus 41% for the S&P 500.

Remarkably, gold is now even outperforming the S&P 500 Index over the past 20 years, with an annualized rate of return of approximately 10.7%, versus 10.3% for the S&P 500.

Can it continue?

Investment success is a double-edged sword. On the one hand, it is evidence of a superior asset. On the other hand, extremely strong performance can signal overvaluation (or even a bubble).

When a stock does extremely well over a long time frame, this generally means the company has consistently surpassed growth expectations. This very often indicates a good business.

But businesses are dynamic. They are constantly growing and evolving. Successful ones generate more and more cash as time passes, which makes these businesses inherently more valuable.

Gold, on the other hand, literally does not change. That is in fact a large part of what makes gold so valuable. It is chemically inert.

One of the reasons gold has for millennia functioned so well as a store of value is that it does not rust or otherwise decay.

Gold is also scarce and difficult to mine. The total supply of gold only grows about 1% to 2% per year, much slower than other commodities.

The only thing that has really changed about gold this year, or over the past 20 years for that matter, is that the total above-ground supply of it has slightly grown.

The price of gold has changed, however. Not because gold has changed—but because the world has changed.

Gold’s rise

Gold can only be understood in relation to the currency in which it is priced. For American investors, what matters is the price of gold in U.S. dollars.

The relationship between the supply of U.S. dollars to the supply of gold is therefore important to understanding the gold price. But this is mainly because the U.S. is the largest economy in the world (representing around 26% of global GDP).

Gold is a global commodity. So it is not just the supply of U.S. dollars that creates demand for gold. The fiat money that is printed by all countries feeds into demand for gold.

The relationship between the U.S. money supply and gold is worth examining, however, because growth in the U.S. money supply is a good reflection of the growth in global money.

Economists have various tools to measure the U.S. money supply. The commonly used metric known as M2 captures physical cash as well as funds held in savings and money market accounts (which can be easily converted into cash).

Since 1980, the U.S. has printed a lot of money. M2 has grown from less than $2 trillion to more than $22 trillion. The compound annual growth rate of M2 has been over 6%.

M2 Money Supply

Total Value (1980 - 2025)

All it takes is a quick glance at the chart above to notice something funny started happening in 2020. While the Federal Reserve has grown the money supply fairly consistently over the decades, it saw a sharp jump during the pandemic.

After the Fed flooded the economy with money, the money supply then began to fall (which it rarely does) once the Fed started raising interest rates (to control the inflation it had just produced).

With the Fed now easing again, monetary creation has resumed. The Fed’s money printers now appear to be more or less back on their pre-pandemic trajectory.

So while the price of gold has risen from around $400 per ounce in the early 1980s to around $3,300 today, this comes in the context of many more U.S. dollars in circulation.

Measuring relative value

To gauge the change in the total value of all gold relative to the money supply, we have to take into account the fact that the supply of gold, as a result of mining, has also increased.

The total value or market capitalization of a stock equals the share price times the number of shares outstanding.

Similarly, we can multiply the price of gold by the total estimated supply of above-ground gold in any given period to arrive at gold’s market cap (or the total value of all gold in the world).

The rate of increase in the gold supply has been considerably lower than the rate of increase of U.S. dollars, but it does have a material impact on the calculations.

Charting the ratio of gold’s market cap to M2 since the 1980s (below), we can see it has fluctuated significantly.

In the early 2000s, when gold had fallen out of favor with the world’s central banks, gold’s market cap was as low as 24% of M2. Today, it sits above 100%.

The total value of all gold in the world now exceeds the total value of U.S. dollars in circulation (based on M2).

The ratio of gold market cap to M2 is now even higher than it was in the 2011/2012 time frame, which saw a sharp peak in the gold price (which was followed by a ~30% correction in subsequent years).

Market Cap of Gold vs. U.S. M2

(Source: Federal Reserve, FactSet)

M2 is just one way of thinking about gold in relation to the broader global economy. It is useful as well to think about the evolution of gold’s market cap in the context of global nominal GDP.

As the total economic activity of the world expands (thanks to the combination of real growth and money printing), it stands to reason that gold should grow in value alongside it.

Comparing the market cap of gold to global GDP produces a similar pattern as the comparison to M2.

Market Cap of  Gold vs. Global GDP

(Source: Federal Reserve, FactSet)

One important difference is that the increase in the relative value of gold from 2020 seems less extreme in the GDP context. The ratio of gold’s market cap to GDP grew 45% between 2020 and 2025, whereas the market cap to M2 ratio grew 65%.

Another angle of attack on the relative value question is to consider the nominal value of all global wealth.

Gold is one of many assets (including stocks, bonds and real estate) that people use to store their wealth. One might presume there should be some consistency in terms of gold’s share of total wealth.

Methods of calculating global wealth vary, however, and there is a lack of reliable long-term data.

One trend in global wealth that does appear to be widely recognized is that, for a variety of reasons, including asset inflation, the ratio of wealth to GDP began to rise around 2000.

As a simplifying assumption, to estimate global wealth in the chart below, we maintain a 400% ratio of wealth to global GDP prior to 2000, and then increase it gradually to 600% by 2025.

Market Cap of Gold vs. Global Wealth

(Source: Federal Reserve, FactSet)

When viewed in the context of global wealth, the rise in the ratio of gold’s market cap from 2020 levels is now closer to 35%. This is not as extreme as the increase we saw in the context of U.S. money supply (65%) or global GDP (45%).

Any way you slice it, gold is up on a relative basis.

The fact that gold has risen over time makes perfect sense. As more money is printed (faster than gold is mined), as the global economy grows, and as global wealth expands in nominal terms, gold needs to rise in dollar terms just to keep pace.

But looking at the relationship of gold to these fundamental drivers, gold appears to be appreciating ahead of schedule, so to speak.

On April 12, 2024, we shared our views on the gold price in the 76report after it hit around $2,300 (Gold Advances, Justifiably). We noted at the time that the trajectory of gold was actually roughly in line with long-term growth in the money supply.

We took comfort in that valuation support, while also noting several exciting demand drivers, including persistent central bank accumulation and the fact that interest rates were peaking.

Gold has since appreciated more than 40%. This raises the question, has it now gone too far?

Paradigm shift

The relative value of gold is higher today than it has been in recent history. Investors in gold today should be cognizant of this fact. There is in a sense a premium now applied to the gold price.

But this premium may well be justified by ongoing shifts in the global financial architecture. These changes elevate gold’s strategic importance as a reserve asset.

U.S. dollar assets (such as Treasuries) still dominate foreign central bank reserves, which total some $12 trillion as of year end 2024. Despite gradual declines, the U.S. dollar still accounts for close to 60% of all reserve assets.

Foreign Currency Reserves

(Source: IMF)

Central banks outside of the United States own approximately 30,000 metric tons of gold worth about $3 trillion. But the ones with the largest positions tend to be EU countries like Germany, Italy and France (collectively 8,200 tons).

Emerging market countries like China are relatively “short” gold. As of February 2025, China is believed to have approximately 2,300 tons of gold, which is approximately 28% of the U.S. position.

Strategic buying

The weaponization of Treasuries that began in the Ukraine conflict has rendered ownership of U.S. dollar assets less attractive in the eyes of emerging market countries like China.

Many countries around the world, from adversaries to historical allies, may not always find themselves aligned with U.S. foreign policy or even economic policy.

The list of countries questioning their relationship with the U.S. (and by extension their confidence in holding U.S. government obligations) has presumably only grown since Trump took office.

There has also been recurrent speculation that we could see some kind of quasi-default on Treasuries as a solution to the U.S. fiscal debt/balance of payments problem.

Ideas being circulated include forcing other nations to swap out their current Treasuries with bonds of much longer maturities (even 50 years) or applying a withholding tax to the coupon payments.

Gold’s success over the last three years came in the context of historically elevated central bank purchases. So long as central bank demand stays high, gold will likely continue to outperform and outpace growth in money supply, GDP and total wealth.

Central Bank Net Gold Purchases

(Source: World Gold Council)

Looking forward

The easy money in gold may indeed be gone. Gold now has a premium valuation in a historical context, whereas a year ago, it was more in line.

Yet the structural demand drivers that have caused gold to advance so sharply over the past year remain firmly in place.

Meanwhile, as we saw as when volatility spiked in March and April, gold continues to function as an effective hedge asset for stock portfolios.

Gold has appreciated sharply but remains in high demand. We continue to support material allocations to gold and gold-related assets within diversified portfolios.

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