(Kitco News) – Gold’s unprecedented rally above $4,200 has been attributed to concerns over an AI bubble, inflation hedging, and U.S. dollar debasement, but with market-fear gauges low, growth solid, and inflation expectations still anchored, these factors don’t tell the whole story, according to Lisa Shalett, Chief Investment Officer, at Morgan Stanley Wealth Management.
Shalett said the traditional characterization of markets as either ‘risk-on’ or ‘risk-off’ fails to account for the relationships between asset classes in the current three-year-old equity bull market – particularly gold.
“Gold, which has historically been considered a ‘safe haven,’ would generally move independently of stocks, which are more risky,” she wrote in an analysis published Tuesday. “Instead, they have been moving in the same direction—mostly up. As equities have surged, gold has risen some 2.5 times since October 2022 and more than 50% for the year to date, with an especially eye-catching rally to record levels in the past 10 weeks.”
Shalett said analysts and investors have proposed several plausible theories, but none fully explain gold’s standout performance – and the yellow metal’s positive correlation with stocks throughout the rally.
“First, it’s possible that investors are buying gold as a hedge against the risk of a speculative AI bubble in stocks,” she said. “The equity market is expensive and top-heavy, dominated by a handful of mega-cap tech stocks—in some ways, resembling the dot.com bubble in 1999-2000.”
However, investor behavior suggests they’re not overly concerned about a market pullback. “Fear gauges like the CBOE Volatility Index have largely remained low,” Shalett noted. “Corporate fundamentals don’t seem to be wavering. And while GDP growth could slow slightly from the second quarter’s healthy 3.8% pace, it should still come in around a solid 3% or a little higher for the second half of 2025, using the Atlanta Fed’s GDPNow as an indicator.”
The second theory is that investors are flocking to gold to hedge against rising inflation.
“Historically, gold has helped investors preserve purchasing power during periods of inflation,” she said. “So there is a possibility that investors are buying gold as an inflation hedge, especially with the full effects of higher U.S. tariffs still to be seen. But investors’ inflation expectations have actually remained stable, with the one-year U.S. dollar inflation swap—usually the most accurate gauge of short-term inflation expectations—staying flat since early April at about 3.2%.”
The third explanation is that investors are buying hard assets like gold to offset the risk of U.S. dollar debasement.
“This thesis suggests that several factors – mounting fears over deglobalization, high U.S. debt and deficits, and threats to the Fed’s independence – have shaken investors’ confidence in the dollar, leading to a reduction in its use globally, including among central banks, which increased their gold holdings during the first half of this year,” Shalett wrote. “While this thesis is compelling, it does not fully explain gold’s recent rise, as global central banks have been diversifying their reserves away from the dollar for nearly a decade. Also, demand for dollar-denominated assets like Treasuries has remained strong, including from foreign buyers.”
Morgan Stanley believes the gold rally is actually being driven by a digital sea change that’s taking place in global finance itself.
“Increasingly, the Global Investment Committee believes gold’s rally may be linked to a global financial shift, as central banks reduce their reliance on the U.S. dollar and anticipate changes in currency markets driven by stablecoins and other digital assets,” Shalett said. “These digital currencies have the potential to disrupt traditional fiat-currency markets.”
“By using gold to back fiat currencies or cryptocurrencies, various entities, including governments, could challenge the dominance of the U.S. dollar in global transactions,” she added. “This trend could support the continuation of gold’s bull market.”
Gold is continuing to show strength on Thursday, with the yellow metal’s spot price hitting a new all-time high of $4,267.58 an hour after the North American open.
Spot gold last traded at $4,259.27 for a gain of 1.22% on the daily chart.
