People often ask, is this the right price? Is it too expensive? Will it go up more? The questions sound sensible but are fundamentally misplaced.
Gold does not generate any cash flow to anchor it. No growth assumption to debate. There is no absolute value to discover. In other words, gold cannot be valued in isolation, but is relative — to real interest rates, liquidity, confidence in the fiat system. Its price is less a reflection of what gold is worth than of what money is worth.
What determines gold prices is a framework, not a forecast.
Let’s unpack this.
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1. Gold versus real interest rates. Because gold carries no yield, it becomes unattractive when real interest rates (nominal rates less inflation) are high. Empirical evidence supports this negative correlation between gold price and the US 10-year Treasury Inflation-Protected Securities (TIPS) yield. We can use this to understand the current gold price based on the historical gold to real yields relationship.
2. Gold as a monetary insurance. Then gold price should be positively correlated to monetary base, for instance, global money supply. This is not a forecast but a reference point on “monetary distrust”.
3. Historically, gold has an inverse relationship to the US dollar. A weak USD tends to raise gold prices.
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4. Gold is often seen as a hedge against volatility. So, gold prices should rise when we observe higher credit risk spread, and elevated geopolitical risks.
5. Like all goods, gold also has a floor price, in the long term, determined by production costs. The present all-in-sustainable production cost for gold miners is estimated at US$1,500 an ounce.
In short, while equities are valued using discounted future cash flows, one can argue that gold is valued using discounted future distrust. To summarise the above:
Gold price = function of (real interest rates + monetary base + USD + volatility)
In this article, we will look at how much of gold prices can be explained by real yields (using the US 10-year TIPS yield as a proxy), size of global balance sheets (M2) and USD strength/weakness.
More importantly, using this relationship between gold prices and economic fundamentals, to articulate what the current gold price implies on expectations for real interest rates. Remember, we are not forecasting. We are providing a framework to understand the economics of gold. One assumes there are fundamental and intelligent reasons for the current gold price (just as we assume stock prices are determined efficiently) and, therefore, understanding what factors drive prices up and down will prove useful in making investment decisions.
Gold price vs global money supply (M2)
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Historically, the price of gold has shown a strong positive correlation to global liquidity, underpinned by its role as a store of value. Gold tracks global monetary base; for instance, as money supply (M2) expands — that is, fiat dilution — gold price rises. From the long-term perspective, the ratio of gold market cap as a percentage of global M2 has moved within a relatively stable range (see Chart 1).
During the earlier years, from 2003 to 2008 prior to the global financial crisis (GFC), gold-to-M2 ratio was low and stable — ranging between 8% and 16% — on the back of gradual M2 expansion and high trust in fiat currency. In other words, gold was cheap relative to liquidity.
Gold-to-M2 ratio surged with the onset of the GFC (2008 to 2012) — breaking above its historical range to a high of 22% — as central banks embarked on massive quantitative easing (QE) programmes. Gold prices rose as a hedge against this decreased purchasing power of money (or fiat debasement). Gold peaked around US$1,900 an ounce during this period (in August 2011), an all-time high at that point.
Post-GFC, from 2014 to 2019, gold prices fell and stagnated as QE was gradually phased out and M2 expansion slowed. As shown in Chart 1, the gold-to-M2 ratio returned to within its long-term historical range (12% to 15%). Gold prices fell to as low as US$1,051 an ounce in December 2015.
From this trough, gold prices started rising anew, and especially at the start of the Covid-19 pandemic when major central banks restarted massive QE. Global M2 exploded in 2020, and gold hit another all-time record high of US$2,064 an ounce in August of that year. Thereafter, gold prices again stagnated as a pandemic supply shock-driven inflation surge led to rapid monetary tightening by central banks — sharply higher interest rates translated to higher cost for holding gold.
Gold price vs real interest rates (TIPS) and USD
Let’s now turn to the relationship between gold and real yields (nominal interest rate minus expected inflation). As mentioned, gold generates no income or cash flow. Hence during periods of high real yields, the cost of holding gold increases, making gold less attractive to investors. Conversely, when real yields are low (and negative), demand for gold rises as the opportunity costs fall.
This relationship has held up in the past decades. Chart 2 shows the inverse correlation between gold prices and real interest rates (10-year TIPS) over different time periods since 2003.
Prior to the GFC (2008-2011), real yields were high. Investors were earning real returns and there was no need for gold insurance (high trust in fiat currency). Gold price gains tracked the gradual expansion in M2.
When the GFC hit, the US Federal Reserve cut nominal interest rates to near zero. Coupled with massive QE, which pushed down bond yields, the liquidity expansion and rising inflation expectations resulted in the collapse in real yields. Low and negative real yields, in turn, lifted gold prices from around US$700 an ounce in 2008 to a high of US$1,900 in 2011.
By 2013, however, the Fed was signalling QE tapering and yields rebounded higher. Rising opportunity cost led to the steep drop in gold prices in the ensuing years (even though central bank balance sheets stayed large and M2 continued to expand). A similar cycle repeated during the pandemic crisis — massive QE and near zero nominal interest rates — sent gold prices soaring in 2020. In fact, gold prices rallied ahead on expectations of falling yields. And gold peaked — and then started declining — even as real yields stayed negative for another two years. This is relevant for our analysis of the gold market today.
The gold-real yields inverse relationship is reinforced by the USD, which tends to strengthen when real yields are high and vice versa, given that gold is traded globally in the greenback. When the USD is strong, it takes fewer dollars to buy the same gold. A stronger dollar also makes purchasing gold in local currencies (like ringgit) more expensive, and therefore, dampens demand. Gold price in USD falls (see Chart 3).
A structural demand shift in 2022: The cost of USD weaponisation
What we have shown in the above paragraphs are the relationships between gold and economic fundamentals of money supply and real yields that have held through much of recent history. However, since 2022, the inverse relationship between gold and real yields has broken down — gold prices rose even as real yields were rising in 2022-2023 and rallied further even though real yields stayed high through 2024-2025 (Chart 2). As a result, gold-to-M2 ratio also breached well above its historical range, reaching as high as 37% (Chart 1) when gold prices hit a fresh all-time high of US$5,595 an ounce in late January. This phenomenon can be attributed, in part, to a structural demand shift.
As we noted at the start of this article, central banks (the light blue bar in Chart 4) started buying significantly more gold following the Russia-Ukraine war — after the US and the West weaponised the USD by freezing Russian foreign currency reserves held in Western central banks and cutting Russian banks off from the SWIFT messaging system (effectively preventing them from settling payments in USD). The unprecedented aggressive move exposed the world’s heretofore over-reliance on the USD to growing geopolitical risks and US policies — and prompted nations such as China and India to de-dollarise, both in terms of reserves (USD and US Treasuries) and trade, and experiment with alternative payment systems. Gold can be kept in domestic vaults, for full reserves control.
While the total annual gold demand remains relatively flattish — capped by highly inelastic supply (the change in annual new gold supply is very small; for instance, by only 0.8% in 2025) — this shift in demand, from market (jewellery and investment) to central banks, is major. Because central banks diversifying their reserves is for strategic reasons, they are far less price-sensitive than market demand. In other words, opportunity costs (real yields) are less important as central bank buying is not returns-oriented. Additionally, central bank holdings are long-term, the gold is locked away, thereby reducing tradeable free float in the market.
In short, current gold prices are reflecting a new level of distrust, geopolitical and system fragmentation. We suspect this means the gold-to-M2 ratio will be sustainably higher than its historical range going forward. That said, there is no question that the current gold price is elevated, even after the recent sell-off, relative to both real yields and M2.
What elevated gold prices are telling us today
Nevertheless, this certainly does not mean that the framework we have outlined above is no longer relevant. On the contrary. Gold’s continued rise in 2024-2025, despite relatively high real yields of around 2%, is telling us something of importance to investment decisions.
Notably, the price surge in 2025 was driven by an expansion in investment demand (green bar in Chart 4), in addition to central bank purchases. This, we believe, is primarily speculative demand — investors were buying gold on expectations of imminently lower real yields. Gold was pricing in the widely anticipated Fed nominal interest rates cuts, particularly once the new Fed chair takes over. And major central banks in the rest of the world were on a monetary loosening path. Based on history, the elevated gold-to-M2 ratio (notably during the GFC), as it is now, is associated with periods of negative real yields.
The Iran war has delayed — but we don’t think derailed — interest rate cuts. As the conflict persisted, the throttling of oil and gas supply through the Strait of Hormuz and damage to energy infrastructure in the Gulf have sent global oil and gas prices sharply higher — triggering global inflationary pressures that will keep central banks from lowering interest rates. And this is partly why gold sold off during this crisis — real yields are now expected to stay high for longer. There is likely also profit-taking after gold’s remarkable rally. The USD is the preferred safe haven, for now, offering liquidity (including to cover margin calls) and real yields. Stronger USD, lower gold prices.
We think the Iran war will end sooner rather than later, one way or another. And we believe that real yields must fall, whether by way of lower nominal interest rates and/or higher inflation. Why?
US public debt-to-gross domestic product (GDP) is 122%, a historically elevated level. The government has been running a persistent annual fiscal deficit, between 5.3% and 6.2% of GDP in 2022-2025 and projected at 5.8% of GDP in 2026, again, well above the historical standards outside of crisis periods (average 3.8% over the last 50 years) (see Charts 5 and 6). Part of the rising government spending and deficit is structural, due to an ageing population (Social Security, Medicare and Medicaid) before taking into account debt servicing. The Congressional Budget Office’s long-term budget projections show deficits averaging 7.2% over the next three decades, driving the rise in debt levels.
Real yields of 2% implies nominal 10-year yields of about 4.5% assuming inflation averages 2.5%. Paying 4.5% interests on US$38.5 trillion debts (that will continue to grow) with fiscal deficit of 6%-7% of GDP is expensive and significantly raises fiscal pressure. Debt servicing is already the fastest growing expense in the federal budget. Coupled with geopolitical fragmentation (de-dollarisation and shift away from USD assets), this situation is clearly unsustainable, especially as existing debts are rolled over at higher costs. (The US has resorted to more short-term financing to lower average costs, but this raises refinancing risks)
Unless economic growth is sustained at higher levels underpinned by robust productivity gains (not impossible but difficult), with stable inflation expectations, credible fiscal path and no political instability. High asks. This is why artificial intelligence (AI) transformation is critical to economies — the reason for the intensity of the US-China tech war and AI investments — to deliver the necessary productivity growth. We think the productivity gains will materialise over the longer term, but short-term gains will be illusionary.
Therefore, the more likely scenario is one where real yields must fall. And that is what elevated gold price is telling us — gold is pricing in the belief that real yields will compress from 2% towards a much lower 0%-1% range (perhaps even negative). The real question for investors is what to do when real yields fall. Cash (USD) and bonds lose real value, forcing investors into riskier and growth assets such as equity and tech in the search for returns. Hard assets like gold, commodities and property should also gain. And who are the eventual winners of the AI race, to reap the long-term gains? Questions we will try to answer in the weeks and months ahead.
Portfolio commentary
The Malaysian Portfolio traded flat for the week ended March 31. Gains from Kim Loong Resources
(+1.6%) and United Plantations (+1.2%) were offset by losses from LPI Capital (-1.4%), Hong Leong Industries (-0.8%) and Maybank (-0.7%). Total portfolio returns remained at 215.1% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 7.6% over the same period, by a long, long way.
The Absolute Returns Portfolio, however, ended 0.6% lower for the week, paring total portfolio returns to 33.6% since inception. The top gainers were ChinaAMC Hang Seng Biotech ETF (+3.5%), SPDR Gold MiniShares Trust (+3.4%) and Berkshire Hathaway (+0.6%) while the top losers were Alibaba (-8%), Ping An – A (-3.4%) and Kanzhun (-3.2%).
Meanwhile, the AI Portfolio fell 4.2%, mirroring the sell-off in global tech stocks. As a result, total portfolio losses widened to 9.6% since inception. The only two gaining stocks were RoboSense Technology (+7.9%) and Marvell (+0.6%) whereas the top losers were Unusual Machines (-16.6%), Minth (-11.3%) and Alibaba (-8%).
A contrarian’s take on oil and inflation
Opinions today are totally on the side that this Iran war will take a long time to resolve and that oil prices will stay higher for longer, causing inflation to rise and economic growth to fall. We express no view on the war. But we think the prevailing views on inflationary fears are overblown.
Why? Is this scapegoating? It’s only been a few weeks and so many governments are already articulating disastrous consequences of the higher oil prices. Does this serve a convenient blame-shifting of challenges that were already in existence?
The nominal price of oil at USD120 today is frightening. But to understand its impact, we need to relate oil price to inflation in real terms. While high oil prices in the 1970s and 1990s triggered high inflation rates, this has not been the case since. The sharp run-up in oil prices during the 2004-2008 period did not have any effect on inflation. While both oil prices and inflation rose from 2020 to 2022, coinciding with the Russian war with Ukraine, inflation went up primarily due to disruption of the global supply chain and the massive cash handouts through quantitative easing by every government in the world, arising from Covid-19 rather than higher oil prices.
Why? We believe the inflation engine has changed.
1. Globalisation crushed pricing power.
From the 1990s to late 2010s, the entry of China, Eastern Europe and Southeast Asia into global trade massively expanded global supply and consumers got access to cheaper imports. Inflation can now be globally arbitraged, rather than locally passed on with higher costs.
2.Technology is structurally deflationary.
Digitalisation has killed many traditional inflation channels. E-commerce leads to greater price transparency. Automation to lower labour intensity. Software achieves near-zero marginal costs. Prices do not rise when marginal costs trend towards zero.
3. Labour lost bargaining power.
In the 1970s to 1980s, inflation was sustained by wage-price spirals. Today, unionisation is low globally. Labour competes with automation and offshore workers. High labour mobility from less-developed economies keeps wages down. And gig economy weakens wage stickiness.
4. More credible central banking.
Post-Volcker, inflation trauma was reset. The US Federal Reserve prioritises inflation. It is all about inflationary expectations and this is now anchored by the belief that central banks will act.
5. Financialisaton absorbs shocks instead of transmitting them.
In the past, oil shocks led to higher production costs, which were then transmitted into higher consumer prices.
Today, oil shocks lead to capital markets adjustments (equities fall, currencies move, margins compress).
6. Demographics are disinflationary.
Ageing populations in Japan, China and Europe lead to lower consumption growth, higher savings and less demand-driven inflation.
7. A more diversified source of global energy demand.
Oil’s share of global energy demand has fallen to a historic low of below 30%, due to efficiency gains, electrification (growth in renewables like wind, solar, hydro and nuclear) and adoption of electric vehicles.
The key takeaway is that inflation is not an event but a process, which requires transmission and reinforcement of the higher prices. That transmission link has been weakened — by globalisation, technology and changes to labour markets.
What really drives inflation today are loose fiscal and monetary policies.
Why this note? Governments are talking up the fear that higher oil prices will trigger higher costs, lower standard of living and adverse economic outcomes. The prescription is more fiscal intervention, more handouts and more subsidies — with an accommodating monetary policy. Our contention is that this prescription is exactly what the patient does not need!
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
