Gold has been called overpriced for four years. Why models are wrong
Anyone looking for an opinion on whether gold is expensive will find plenty of analyses with a clear verdict: according to fair-value models, yes. Those same models have been signalling overvaluation continuously since 2022, while the price has moved substantially higher. That is neither coincidence nor a calculation error – the yardstick they use has stopped describing reality. Let us look at what the price of investment gold was measured against for twenty years, why that no longer holds, and what it means for someone who actually buys gold bars.
What gold was measured against for twenty years
Gold pays nobody anything. It has no coupon like a bond, no dividend like a share and no interest like a savings account. Holding it therefore costs something – precisely what the money would have earned elsewhere. That is the opportunity cost, and it is measured by the real yield on government bonds, meaning the yield after expected inflation is deducted.
An example: if a government bond pays five percent and inflation runs at two, you earn three percent in real terms. In that situation gold has to gain at least as much just to match the bond. When the real yield falls below zero, as it did in 2020 and 2021, the bond loses purchasing power and non-yielding gold suddenly becomes competitive.
Valuation models were built on this reasoning, and they worked remarkably well. From roughly the turn of the century, a one percentage point move in US real rates translated into about a fourteen percent move in the gold price in the opposite direction. Analysts built price targets on it, because all they had to estimate were interest rates.
When the yardstick failed
The breakdown of this relationship can be shown across two periods without any model at all. The data were set out by the Financial Times, based on calculations by the investment bank UBS.
| Period | US five-year real yields | What the model implied | What actually happened |
|---|---|---|---|
| March 2022 – October 2023 | rose by more than 4 percentage points | a fall of roughly 55 % | a gain of 7 % |
| October 2023 – 2025 | fell by just under one percentage point | a modest gain | a gain of 110 % |
The first row is fatal for the old logic. This is not a deviation of a few percent, but the difference between a predicted halving and an actual rise. The second row shows the other half of the problem: the response to falling rates was far sharper than it should have been. The relationship has not disappeared, then, but it is no longer symmetrical – cheaper money helps gold, while dearer money barely hurts it.
“Gold today responds much more strongly to falling real yields and much less to rising ones. This asymmetry has made most existing fair-value models obsolete.”
Bhanu Baweja, chief strategist at UBS Investment Bank, speaking to the Financial Times
What gold started measuring instead of interest
When an asset stops tracking interest rates, it has started responding to something else. In gold’s case that something is trust in the borrower. A government bond is a state’s promise to pay out money in ten years. The price of that promise depends not only on the interest, but on how certain the promise is and whether anyone can make it impossible to keep.
That is exactly the question raised in 2022, when it turned out that reserves held in foreign government bonds can be made inaccessible by a political decision. For reserve managers this was not a philosophical debate but an operational risk that nobody had priced in until then. Gold in your own vault has no issuer and cannot be devalued remotely.
What followed is clearly visible in the data. Central banks of emerging economies and sovereign funds lifted the gold share of their reserves from roughly 5 to 7 percent to around 11 percent. In developed countries, which never stopped holding large amounts, the share is about 26 percent. The gap between 11 and 26 percent shows how much room to keep buying still remains.
The bond has stopped being insurance
The second half of the explanation lies outside gold. A government bond is not bought for its yield, but because it rises when equities fall and cushions the loss. That role has been eroding for several years.
At the end of August 2026, yields on European ten-year government bonds climbed to levels the market had not seen in years.
| Country | Ten-year bond yield | Note |
|---|---|---|
| France | 4.16 % | highest since 2008 |
| Italy | 4.15 % | – |
| Spain | 3.76 % | – |
| Portugal | 3.67 % | – |
| Germany | 3.31 % | highest since 2011 |
A bond’s yield and its price move in opposite directions: a rising yield means whoever holds the bond is down. This reaches households without their noticing – bond funds are the backbone of conservative investment strategies and of many pension products.
Vincent Deluard, an analyst at StoneX, adds an observation from the US market: during the last three equity corrections it was not only shares that fell, but US Treasuries and the dollar alongside them. The insurance failed at precisely the moment it was supposed to work.
“US Treasuries still yield less than the neutral rate of 5 to 6 percent and lose value in US-made crises because foreigners sell them off.”
Vincent Deluard, StoneX
Behind all of this sits a level of debt nobody wants to finance at a higher cost. US federal debt passed 39 trillion dollars this year, and UBS estimates that public debt will roughly double over the coming decade. A government that has to refinance such a volume every year has a strong interest in low long-term rates – even at the cost of the central bank keeping rates lower than inflation would justify. Economists call this fiscal dominance, and for gold it is a favourable combination from both sides: lower real rates together with greater distrust of long-dated government debt. It is the latest form of an old problem, described in our article Money is a medium of exchange, not a store of value.
What it means for the buyer
For buyers outside the dollar area there is one more factor: the exchange rate. Gold is quoted in dollars, so the price in a local currency is the product of the dollar price and the rate. A strengthening home currency absorbs part of the rise, a weakening one amplifies it.
The second thing fair-value models ignore entirely is the difference between the price of the metal and the price of a specific bar. The premium for manufacturing falls as weight increases, but not evenly – current prices of Argor-Heraeus bars at GOLDU show it precisely:
| Argor-Heraeus bar | Price | Price per gram |
|---|---|---|
| 1 g | 153.80 USD | 153.80 USD |
| 10 g | 1,431.75 USD | 143.18 USD |
| 20 g | 2,852.31 USD | 142.62 USD |
| 1 Oz (31.1 g) | 4,448.38 USD | 143.02 USD |
The gap between the most and least expensive option is around eight percent per gram – more than the annual spread between an optimistic and a pessimistic price forecast. Choosing the weight therefore matters more to the outcome than guessing where gold will be in a year. We work through the arithmetic in Premium on gold: why the price per gram differs.
When the old rule will apply again
This is not a permanent law but a state of affairs that can end. For gold to fall back under the rule of real rates, inflation and its volatility would have to decline, bonds would have to rise again when equities fall, and reserve managers would have to stop seeing government debt as politically vulnerable. None of that has happened yet. When it does, bonds with a real yield will once again be strong competition for a metal that pays out nothing – that is the honest other side of this argument.
What to take away
For a private investor the instrument does not change, the reason does. Gold today is not a bet on the central bank cutting rates, but insurance against something going wrong on the government debt side – and insurance of that kind is not bought according to whether it happens to be cheap. According to the World Gold Council, investors hold only around three percent of their financial assets in gold, so even a small shift in that share means a large volume of demand.
In practice this means regular smaller purchases rather than attempts to catch the bottom, physical metal rather than paper claims, and a sensible weight. How much gold belongs in a portfolio is covered in How much gold in a portfolio; the differences between physical, paper and mining gold are explained in Paper gold, mining stocks or physical gold. For building a reserve step by step, see Buying gold regularly. Alongside gold coins and bars, investment silver offers a lower entry price.
Frequently asked questions
What is a real yield and why is gold measured against it?
It is the yield on a government bond after deducting expected inflation, in other words the actual gain in purchasing power. Gold produces no yield, so the real yield represents the price of holding your money in metal rather than in an interest-bearing asset.
Does this mean interest rates no longer affect the gold price?
They do, but unevenly. Gold responds strongly to falling real yields and only weakly to rising ones. Rates remain one of the factors, but no longer the main one.
Why did it break in 2022 of all years?
Because it became clear for the first time in modern history that reserves held in the government bonds of developed countries can be frozen by a political decision. Since then reserve managers have priced in a risk that never entered the models, and have shifted part of their reserves into a metal with no issuer.
Isn’t gold overpriced after such a rise?
Models based on real yields have called it overpriced since 2022 and have been wrong every year so far. That is not a guarantee of further gains – only a reason not to rely on a single yardstick. The price can fall even in an environment that otherwise favours it.
How does this concern a buyer outside the United States?
Gold trades in dollars, so the price in any other currency combines the dollar price with the exchange rate. A strengthening currency removes part of the gain, a weakening one adds to it. Over longer periods the exchange rate tends to dampen the swings.
Should I wait for a dip or buy gradually?
Timing eludes even institutions with models and data at their disposal. Regular smaller purchases average the price over time and remove the pressure of getting one decision right. The difference between weights is usually larger than the difference between buying today and buying in a month.
About the author
HEFFO, GOLDU’s blogger, sees everything in context. From a pile of global numbers and news, he fishes out what matters and adds a conclusion you would not have expected. The precision of his conclusions and his love of chocolate suggest he has lived in Switzerland for years.
