Usually, when the price of gold rise this high as it is now, it is seen to witness a massive decline. In August 2020, gold stood more overvalued than it is in the last 50 years. It is the conclusion reached by the latest research conducted by Campbell Harvey, a finance professor at Duke University, Tadas Viskanta, founder/editor of AbonormalReturns.com, and former portfolio manager at TCW Group, Claude Erb. The timing of the research proved to be highly remarkable because the enthusiasm to invest in gold reached a new peak recently.
One of the fund managers even predicted recently that the price of gold might even reach $4,000 per ounce in the near future. However, it needs to be noted here that the research in the discussion here has nothing to do with the volatility in the gold prices, as witnessed in recent times. As per many economic analysts, the gold is currently going through a price-discovery phase and unsure how long it would remain in this phase. Historically, it has been seen quite often that when the price of gold is high after being inflation-adjusted, its performance subsequently is almost always invariably low, and vice versa.
As per the speculation of the research conducted, it is predicted that the price of gold would be lower in the coming years than at the price point, it is hovering over at the moment. Many of the gold-enthusiasts would go against the predictions made by the research and point towards the extensive money creation conducted by Federal Reserve in March.
One other reason behind the massive Bull Run in the gold prices is gold ETFs. As per the data gathered by Bloomberg, the global holdings by gold ETFs are now over 3,356.6 tons. It easily surpasses the holdings of any government in the world, except the United States. It is seen recently that there is a strong correlation between the actual price of gold and that of total global ETF holdings. However, the researchers are not yet clear as to what this correlation may be. If the high price of gold is the reason why the ETF holdings are witnessing the influx of cash, then the ETF holdings would definitely take a hit when the gold prices decline.
It is expected that the gold may hit a new all-time high during its current phase of price-discovery. However, historically, gold prices have always plunged whenever its inflation-adjusted price has sharply increased as currently.