The gold market is poised precariously around $4,000 an ounce, with the metal having fallen from last month’s record highs above $4,360.
While many analysts view the drop as a healthy correction in a long-term uptrend, famed British economist Jim O’Neill, former UK Treasury minister and ex-chairman of Goldman Sachs Asset Management, sees arguments for both a bullish and bearish future, suggesting the recent rally has the appearance of a bubble, according to a Kitco.com report.
A major factor in the recent sharp increase in gold’s price has been investment demand, especially from smaller retail investors.
O’Neill noted that a defining trait of a bubble is self-perpetuating momentum.
Fundamentals
“Once FOMO (‘fear of missing out’) sets in, even marginal or irrelevant developments can add to the excitement. The question, then, is whether these justifications can withstand scrutiny,” he said in a note.
Gold is traditionally viewed as an inflation hedge, and while inflation is still high, it has not worsened, according to O’Neill.
The Bureau of Labor Statistics reported in September that the annual headline and core Consumer Price Index stood at 3%, exceeding the Federal Reserve’s 2% target.
According to O’Neill, the current environment may not warrant gold’s unprecedented rally.
Given that much of the price acceleration occurred after the US dollar had already registered its 2025 decline, and after US bond yields had fallen noticeably as the outlook for US inflation and inflation expectations improved, I can see why some commentators have declared it a bubble.
Diversification by central banks crucial
O’Neill also presented a bullish outlook, suggesting that gold’s growing appeal as an alternative currency asset is due to nations seeking to diversify away from the US dollar.
The decision by major holders of conventional foreign-exchange reserves, particularly China and Russia, to strategically increase their gold allocation is understandable, according to O’Neill.
This move, which includes encouraging other BRICS members to follow suit, aligns with their explicit goal of establishing an international monetary system that offers an alternative to the current dollar-based structure, he noted.
Jim O’Neill is credited with coining the term BRICS, an acronym for Brazil, Russia, India, and China.
This economic bloc has been actively working to challenge the dominance of the US dollar as the world’s reserve currency.
The group has since welcomed additional members, namely South Africa, Saudi Arabia, Egypt, the United Arab Emirates, Ethiopia, Indonesia, and Iran.
Gold’s future depends on inflation and interest rates
O’Neill asserted that despite gold’s resurgence as a vital global monetary asset, its future trajectory is fundamentally tied to its relationship with inflation and interest rates.
“In today’s context, if markets believe that central banks will ease notably more—or at least will not tighten further—despite underlying inflation not improving, a stronger gold price is consistent with the historical pattern,” he said in his commentary.
I have no idea whether the bearish or bullish case will win out, especially for the next 5–10% move, and neither does anyone else. But I will certainly be watching closely—and keeping an open mind about what I see.
Despite recent struggles in the gold market following Federal Reserve Chair Jerome Powell’s assertion that a December rate cut is uncertain, market sentiment, as tracked by the CME FedWatch Tool, still leans heavily toward a cut, with a 71% perceived probability next month.
However, gold prices have struggled to mount a significant rally since the meeting, and prices have been hovering around the $4,000-per-ounce mark.
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