Despite gold's significant rally over the past year, and no shortage of explanatory frameworks for its rise, some market observers point out that none of the mainstream theories have demonstrated stable, statistically significant predictive power. This implies that gold's strong performance in 2025 is difficult to reliably attribute to specific causes, making its trajectory for this year even harder to forecast. The observer indicated that the lack of a "statistically verifiable and repeatable explanation" exposes gold bulls to heightened uncertainty; without clear driving factors, investors struggle to assess the potential for both price appreciation and pullbacks in gold this year.
Among the "common narratives," the idea that gold is an inflation hedge is one of the most prevalent explanations for its short- and medium-term fluctuations. The theory suggests that rising inflation pushes gold prices up, while disinflation leads to weaker prices. However, based on data from the past forty years, comparing year-on-year changes in CPI inflation with YoY changes in gold prices reveals a coefficient of determination of only about 1.1%. This indicates that inflation changes explain a very limited portion of gold price movements, and the relationship is not statistically significant at the commonly used 95% confidence level.
Some gold investors instead emphasize "expected inflation" over "realized inflation," arguing that gold is more sensitive to shifts in future inflation expectations. In examining this, MarketWatch columnist Mark Hulbert, using the Cleveland Fed's monthly inflation expectation model forecasts, stated that neither changes in 12-month nor 10-year expected inflation showed a significant correlation with gold prices. The explanatory power was even weaker than that of actual CPI inflation changes. He added that this does not mean inflation and gold are "completely unrelated," but historical experience suggests such a relationship is more likely observable only over ultra-long cycles, spanning decades or more. These conclusions align with views presented by Duke University Professor Campbell Harvey and former TCW commodity portfolio manager Claude Erb in their research "The Golden Dilemma."
Within the "safe-haven" narrative, markets often link gold prices to geopolitical risks. After testing this using the Geopolitical Risk (GPR) index developed by Federal Reserve System researchers, the observer reported that the YoY change in the GPR index explains only about 0.1% of the YoY change in gold prices, a figure that is almost negligible.
A similar conclusion was reached when using the Economic Policy Uncertainty (EPU) index to assess whether gold hedges economic risk. The YoY change in the EPU index explains only about 0.9% of the change in gold prices.
Addressing the narrative that "central bank gold buying drives prices," the observer noted that while World Gold Council data shows a substantial increase in the Chinese central bank's gold reserves since 2000, suggesting surface-level explanatory power, the coefficient of determination between the YoY change in China's gold reserves and the YoY change in gold prices is only about 0.6% over short-to-medium terms. This is also insufficient to serve as an effective timing signal.
Among the various indicators, the fund flow metric of "net inflows into physically-backed gold ETFs" showed a relatively higher correlation with gold prices. Hulbert pointed out that this is unsurprising: ETF inflows typically mean funds need to buy gold, while outflows indicate selling. However, even for this indicator, statistical testing failed to achieve significance at the 95% confidence level, making it difficult to rely on as a dependable forecasting tool.
Given that the aforementioned factors struggle to serve as stable coincident indicators, let alone leading indicators, Hulbert believes this is a key reason why market timing in gold has long been notoriously difficult. Citing tracking results from his performance audit firm on various gold timing strategies, Hulbert noted that across all rolling 10-year periods since the mid-1980s, the average gold timing strategy underperformed a simple "buy-and-hold gold" portfolio by approximately 4 percentage points annualized.
Hulbert concluded that gold investment inherently carries risk. In the absence of a reliable, verifiable explanatory framework and predictive indicators, investors' ability to understand gold price behavior becomes significantly more challenging. Consequently, strategy formulation and risk management require a higher margin of safety and stricter position discipline.
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