Aaron Brown reveals: "The current gold rush has nothing to do with inflation...nor with gold"

SadaNews - The price of gold has recently shattered a record that has stood for more than four decades, when adjusted for inflation. At current levels, the purchasing power of gold has surpassed its peak recorded in January 1980 at $850, equivalent to $3,524 in today's value.

There are usually two factors blamed when gold prices rise; fear of inflation and fear of financial constraints, as in the case of sanctions or capital restrictions. Both peaked in January 1980, when the consumer price index (in the United States) rose by 13.9% year-on-year, shortly after President Jimmy Carter froze Iranian assets the previous November.

However, the suspected factors have provided evidence of their innocence in 2025; gold prices did not trend upwards or downwards from the onset of the pandemic until the end of October 2022, but they have been rising steadily since then. As for the inflation rate, it peaked at 9.1% in June 2022, but has since declined to 7.7% and is slowing down. The profitability threshold for 10-year bonds—essentially the market's forecast for average inflation over the next decade—hit its highest level at 3.04% in April of that year, dropping to 2.51% by the end of October.

High cost of holding gold

Moreover, it is difficult to place the blame on rising international tensions or American financial hubris. Russia invaded Ukraine for the second time in early 2022, and sanctions quickly followed. However, interest had waned by October. The attack by Hamas on Israel would not happen until a year from this month. There were no significant international, political, or financial events at that time.

Every price is essentially a ratio; if the rise in gold is not caused by pressures facing the dollar, the reason could be the increased attractiveness of gold, rather than a decrease in the attractiveness of the dollar. Additionally, the cost of holding gold is high, nearing 0.5% annually in exchange-traded gold funds. If physical gold is purchased, storage and insurance costs incur, and these costs rise when renewing gold futures contracts.

At the same time, the investor does not receive the positive real return that can be obtained from other assets. The easiest way to estimate this loss is to track the return on 10-year Treasury Inflation-Protected Securities, which currently guarantees a return above the inflation rate of 1.67%. Consequently, someone who owns an ounce of gold in an ETF gives up a potential income of 2.17%, or $79 annually.

When gold owners demanded compensation

Before questioning what gold investors would gain from $79 annually, let’s consider the estimated value of holding an ounce of gold over time, adjusted for inflation to reflect current dollar value.

Although the price of gold was rising from the beginning of 2018 until the pandemic broke out, the estimated value of holding an ounce of gold was declining, turning negative in June 2020 and not returning to the positive side until April 2022. During this period, investors were demanding compensation for holding gold, rather than the customary situation where they were willing to pay for acquisition. Owning gold yielded a higher return than buying inflation-protected Treasury bonds by $9 annually.

A year before the rise in gold prices, the situation of investors in the precious metal changed; they went from demanding $9 annually for holding gold to being willing to pay as high as $91 for holding it. This was due to rising yields on inflation-protected Treasury bonds, not rising gold prices. However, it is worth noting that this represents a rise in the amount investors were willing to pay for owning an ounce of gold, not an increase in the price of the precious metal.

Hedging tools show the same trend

Interestingly, during the pandemic, the Russian invasion, and the inflation panic under the Biden administration, investors wanted compensation for holding gold, and then reverted to being willing to pay for owning the precious metal once conditions stabilized.

We saw the same pattern in other hedging tools against inflation and the risk of financial constraints in the United States, such as the Swiss franc and "Bitcoin," which displayed little notable trend when inflation rates peaked, political uncertainties reached a climax, and international conditions worsened. Then, once the risks subsided, the value of the hedging tools quickly rose.

Gold attracts interest away from stocks

What if gold is merely the right hand of the magician distracting attention from what her left hand is doing, the attractiveness of holding investments in a primary portfolio such as the S&P 500?

The following chart illustrates the periodically adjusted earnings yield of the S&P 500 minus the yield of inflation-protected Treasury securities for stocks equivalent to the value of an ounce of gold. The line has been inverted to allow comparison with the accompanying gold chart. At the top of the chart, investors are willing to pay a large amount for owning gold and accept only a small amount for holding stocks, while at the bottom of the chart investors demand a large amount for owning either gold or stocks.

The two lines appear similar; both decline before the COVID pandemic, although the pace of the stock decline was faster compared to that of gold. Stocks quickly recovered upon the pandemic outbreak (investors demanded more for holding stocks), while little changed for gold until mid-2022. Since then, gold has outperformed stocks.

If investors fear inflation, the profitability threshold should have risen, but it has been moving in a narrow range during 2025, starting from 2.17%, then 2.47%, reaching 2.37% by the end of last week.

Changes in the real yield rate behind the price rise

It is clear that the main driving force behind both the S&P 500 index and gold prices lies in changes in the real yield rate, which investors demand for holding safe, inflation-protected assets. As this rate declines during 2025, there has been little significant change in the value investors expect from holding gold, hence its price has soared.

If you are willing to pay $90 annually for any gain you will achieve from holding an ounce of gold, as real yield rates decline, you would be prepared to pay a higher amount for that ounce. Meanwhile, stock investors have reduced their expected real yield rate as yields on inflation-protected Treasury bonds have fallen, and the S&P 500 has only risen by 12%.

Given that there is no concern about inflation, significant changes in the expected real yield on stocks, not gold, indicate fears of recession. To understand markets in the current period, we must follow inflation-protected Treasuries and stocks. Perhaps the allure of gold is attractive, but the shine may distract from the fundamental data.