Spot gold markets posted fresh highs north of US$3,500/oz to begin September, driven by a confluence of macro factors — ongoing steepening in developed-market government bond curves, politicization of the Federal Reserve and significant U.S. policy uncertainty.  

The Fed is widely expected to cut interest rates by 25 basis points at the September FOMC, but questions have been (re)raised about its independence and apolitical decision-making process heading into 2026 — and the potential negative impact that could have on the U.S. dollar. 

 Yes, the U.S. has struck some trade deals, but U.S.-China geostrategic tensions persist, with yet another extended trade deadline now pushed to November between the two economies responsible for ~45% of global GDP. 

 Yes, the White House signed the OBBBA fiscal bill, but its stimulative impact raises concerns about the U.S. debt trajectory, deficit expansion, and inflation impulse. 

This is a lot to digest. Unmistakable though, is the fact that the second-best performing stock in the S&P 500 is Newmont Corp. (NEM), the largest gold producer in the index — up nearly 100% and trailing only Palantir (PLTR). Meanwhile gold as an underlying asset is up 35%+, outperforming most assets globally.   

Longer term, gold has truly been an incredible asset. Since 1998, it has outperformed the best performing market in the world — the S&P 500. 

We highlight the historical returns of gold and the more recent drivers of its performance, closing with our musings on the recent drivers of its performance.  

Gold Bugs vs. Stock Bugs: Who Is Right?

In our Q3-2024 letter we wrote: 

“If you call someone a bug, that cannot be a good thing.  A requested summary of ‘gold bugs’ from ChatGPT provides a direct link that explains that gold bugs tend to harbor conspiracy theories about the government or market manipulation. The term was coined in the 1930s when trust in traditional investments waned. It is still alive today, as though favoring gold somehow makes you a person who believes in things with less than obvious proof or somehow believes in things that question the status quo.  We are not in that camp; we just follow the data. The data leads us to an obvious conclusion — gold has proven its ‘metal’ over many decades.” 

As many long-time TwinFocus clients are aware, we believe that gold is a reasonable and logical holding for any investor looking to improve risk-adjusted returns. The current status quo of ever-larger fiscal deficits funded by promissory notes ensures that gold will continue to have value as an antidote to this trend.  While gold performs well during panics, as the cartoon suggests, there are other forces at work in addition to global uncertainty. 

Is gold a bug in a portfolio? Are investors who own gold irrational or conspiracy theorists? We believe not. They have reached a logical conclusion based on the common-sense appeal of gold. 

Who has been buying gold? 

As a measure of who cares, central bank ownership of gold as collateral against foreign currency reserves is telling. International central bank reserves of gold declined for much of the past century, but starting around 2010—when the U.S. began aggressive yield curve control—foreign banks began diversifying away from G7 bonds and into gold. The rationale is simple: as yields were suppressed, it made little sense to own more bonds, and gold emerged as a logical hedge. 

The takeaway from the chart is clear: central banks still covet gold, and since the global financial crisis, their holdings have steadily increased. As we highlighted last year, this trend accelerated following the Ukraine war, when the U.S. effectively weaponized the dollar. But there are also deeper undercurrents that make it logical for central banks to diversify their reserves. 

Interestingly, for the first time since the 1970s, we see a reversal of a long-standing trend. With memories fresh of high inflation, central banks routinely held gold at two times their bond holdings; as the memory of inflation dissipated, central banks divested gold continuously for three decades.  

Further to the point, the impact of sanctions related to Ukraine was unprecedented in scale, even targeting wealthy citizens. This likely awakened some of the deepest fears among our global partners and further escalated foreign demand for a “neutral asset,” with gold emerging as the most credible alternative. 

What about inflation as a cause? 

Gold is also viewed as an effective hedge against currency debasement or inflation, shown below is the market’s best gauge of inflation expectations, the 5-year forward embedded expectations in the TIPS market.  

Inflation expectations have barely budged from their five-year trend. At least in this case, it appears that gold is not running due to inflation expectations. Gold may be discounting a different path or outcome than what is implied by the TIPS curve, but it is unlikely that inflation expectations are the short-run cause. 

Is uncertainty caused by Trump’s approach and tariffs a cause?  

As alluded to in the cartoon, gold is known as a hedge against the unknown — and at present, we have more unknowns than usual. President Trump appears to keep the world on guard most days, so it is logical that the uncertainty stemming from his actions could be contributing to increased market fear. While this argument has some intuitive appeal, the data does not seem to support policy uncertainty as the primary driver of gold’s rally. In fact, much of gold’s recent performance has occurred while policy uncertainty was falling, not rising — particularly post “Liberation Day.” 

If aggressive yield curve control is now in the ninth inning, what happens?  

Interestingly and counterintuitively, gold has shown an unusual relationship with long-term rates in Japan. The typical argument is that gold is inversely correlated with interest rates, yet in this case, it appears positively correlated. So, what has changed? 

We suspect that, on the margin, demand for bonds has fallen as the “dream” of the perfect 60/40 hedge has come into question. Bonds as the complement to Equities in many portfolios has served investors well during Yield Curve Control, however as we exit QE globally, bonds will no longer be a solid diversifier.  Japan is the first proxy as they have engineered yield curve and rate suppression for longer than others, as the market discounts their exit, the value of a bond hedges moves from exceptional to negative.   

We have written about this extensively, but to reiterate, bonds are likely not inversely correlated with equities, except during periods of yield curve control. As markets exit the era of yield curve control in Japan first, then Europe, and then the U.S., demand for uncorrelated assets increases — and gold has been the primary beneficiary. 

 

What about U.S. retail and institutional buyers?  

Are they driving up the price?  

No. We see scant evidence, at least in ETF net creation, that there is substantial retail interest in gold assets through ETF structures. While we acknowledge that in Asia, speculation is higher through other vehicles, at least in North America, we can be confident that investors are not meaningfully long gold relative to prior trends. Shown below is an overlay of performance of gold vs. ETF creation: in recent years, investor demand has been tepid. 

Is the Fed now more political? 

Could their more dovish stance be a catalyst for gold? 

Likely yes. Shown below is the futures curve for each interval of rates. The lighter line represents market expectations for rates on July 1, and the darker line reflects expectations as of September 4, 2025. The move is modest, but it does appear that Trump’s rhetoric — and similar commentary — has led markets to price in slightly more dovishness in the forward rate curve, approximately 10–20 basis points over the next three years. While not large, this shift lowers effective real rates, which increases demand for gold as its carry cost relative to other currencies has declined. 

This move alone signals relative calm in bond markets. Although, we suspect that it had more impact on assets like gold, which carry more exposure to worst-case scenarios. 

 

So why is gold up?  

In the short run, during Q3 of this year, gold’s performance appears strongly correlated with Trump’s aggressive posture toward the Fed, which led to slightly lower real rates. This increase in gold’s price brought algorithmic and technical investors into the market, and gold took off.  Potentially the broader fight between our central bank, treasury and presidency signal the end of Bretton Woods II, but we won’t know that until the dust has settled.    

In the long run, the rally since around 2010 appears driven by several key factors: 

• First, this is not yet an investor demand story, it is a central bank demand story. The increasing need to diversify away from global bonds has driven more demand for gold. In our view, this trend remains intact, and these buyers are largely price-insensitive, as geopolitics and diversification — not profits — are the primary drivers. 

• The retreat from explicit yield curve control have created global demand for truly uncorrelated assets. Gold is a likely winner in this environment. 

• While difficult to quantify, the rise in policy uncertainty may be casually related to gold’s price. However, it does not appear that a significant “fear premium” is embedded in the asset. 

• Finally, inflation — despite its prominence in media narratives — does not appear to be a meaningful driver of gold’s recent price increases. 

We believe gold belongs in well diversified, multi-asset portfolios, with sizing dependent on the diversity of other holdings and the particulars of each investor. The recent 25-year performance is not a bug — it is the logical conclusion to the end of an era.  Gold is now proving a fantastic diversifier for dollar-based assets, and stocks and bonds are acting more like the same trade.  

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