Dangerous Bull Market: Six Theories Supporting Gold's Surge Proven False by Data

Gold investors naturally assume that there is nothing mysterious about the reasons behind the surge in gold prices over the past year. They have no shortage of theories to explain the rise in gold prices.

But MarketWatch columnist Mark Hulbert writes: "As far as I know, there is no theory that has a statistically significant and effective track record in predicting gold prices. Therefore, the excellent performance of gold prices in 2025 cannot actually be explained. In other words, it remains a mystery."

This mystery should be a concern for gold bulls. Without a convincing statistical explanation for the sharp rise in gold prices, it is impossible to predict how it will perform this year.

Below is a list of popular theories believed by gold bulls. Hulbert says that none of them can consistently serve as a coincident indicator, let alone a leading indicator.

1. Gold as a Hedge Against Inflation

Perhaps the most common explanation for the fluctuations in gold prices is that gold can hedge against inflation—when inflation heats up, gold prices rise, and vice versa. However, as an indicator for guiding the short- and medium-term movements of gold, inflation data is not up to the task.

Consider the past 12 months’ changes in the CPI annual growth rate alongside the corresponding 12-month changes in gold prices. Then, consider the R-squared value of the correlation between these two data sets. (R-squared measures the extent to which changes in one data series can explain and predict changes in another series.)

According to data from the past forty years, as shown in the chart, the R-squared value in this case is only 1.1%. This means that the 12-month change in the annual CPI growth rate explains only 1.1% of the 12-month change in gold prices.

Not surprisingly, this low R-squared value is not significant at the 95% confidence level, which statisticians commonly use to determine if a pattern is real. This is tantamount to saying that the change in the CPI annual inflation rate is nearly useless as a short-term gold timing indicator.

2. Gold as a Hedge Against Expected Inflation

Some gold investors argue that gold does not react to actual inflation rate changes that are only known after the fact, but instead responds to changes in expected future inflation.

To test this possibility, Hulbert used monthly forecast data from the Cleveland Fed’s inflation expectations model. He found no significant correlation between these forecasts and gold prices. In fact, whether it was the 12-month or 10-year expected inflation changes, their explanatory power was even weaker than that of the annual change in CPI.

This is not to say that there is no relationship between inflation and gold at all. But history shows this correlation only exists when looking at very long periods (if not centuries, then at least decades).

This is the finding of a study titled "The Golden Dilemma" co-authored by Duke University finance professor Campbell Harvey and former TCW Group commodities portfolio manager Claude Erb.

3. Geopolitical Risk

Another popular view is that gold can hedge against geopolitical risks—when risks rise, gold prices go up, and vice versa. To test this theory, Hulbert used the Geopolitical Risk Index (GPR) constructed by Dario Caldara and Matteo Iacoviello of the Federal Reserve Board’s International Finance Division. They calculate this index by counting the number of articles related to adverse geopolitical events in the top 10 major newspapers each month (as a proportion of total news articles).

"Once again, I came to a negative conclusion. The past 12 months’ change in the GPR index explains only 0.1% of the corresponding change in gold prices—so low that it is almost invisible in the chart above," says Hulbert.

4. Economic Policy Risk

When testing whether gold can serve as a hedge against economic risks (as measured by the Economic Policy Uncertainty Index, EPU), the conclusion is similar. Again, no correlation exists.

The EPU index is measured by counting the frequency of references to the economy, government regulations and policies, and uncertainty in newspaper articles. The past 12 months’ change in the EPU index explains only 0.9% of the corresponding change in gold prices.

5. China Gold Purchases

Another widely circulated theory links the recent gold bull market to gold purchases by the People's Bank of China.

According to data from the World Gold Council, since 2000, China’s gold reserves have more than tripled. Although this explanation sounds plausible, it provides very little guidance for short- or medium-term trends in gold. The R-squared value between the past 12 months’ change in China’s gold reserves and the past 12 months’ change in gold prices is only 0.6%.

6. Net Inflows into Gold ETFs

The data series with the highest correlation to gold prices is the net inflow into physical gold ETFs over the past 12 months.

This is not surprising, since ETF inflows result in more gold purchases, and vice versa. However, even here, the correlation between inflows and gold prices is not statistically significant at the 95% confidence level.

Coincident vs Leading Indicators

None of these theories can provide a solid coincident indicator for gold price fluctuations, and they all fail as leading indicators as well, which is not surprising. This is one of the reasons why gold market timing is so difficult.

Hulbert writes: "This helps explain why the dozens of gold market timing strategies monitored by my performance audit firm have significantly underperformed the market. According to all rolling 10-year data I’ve tracked since the mid-1980s, the average performance of gold timing strategies lags a buy-and-hold gold portfolio by 4.0 percentage points per year. What’s the conclusion? Investing in gold is risky—especially when there is no reliable basis to explain its behavior, the risk is even greater."