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Informist, Wednesday, Dec. 10, 2025

 

MUMBAI – Even as global gold prices keep rising, scaling new heights in quick succession, there is no shortage of experts who suggest that prices of the yellow metal will continue to go up in the near term, mainly as safe-haven investment. However, in the December issue of the quarterly review of the Bank for International Settlements, a research article, analysing various parameters, cautions that gold and equity markets are in bubble territory and prices could see sharp corrections. The authors could not, however, say how far or near in the future such corrections are likely.

  

"Throughout the recent market rally, US equities and gold surged in lockstep," said Giulio Cornelli, Marco Jacopo Lombardi, and Andreas Schrimpf, authors of the paper. "The sharp price increases of both assets and their growing presence on the radar screens of non-specialised media have attracted substantial investment flows from retail investors and sparked a debate over the possibility of asset price bubbles."

 

It is well known that market bubbles are characterised by rapid and accelerating price surges, followed by sharp corrections. However, the authors of the BIS paper point out that the identification of a bubble remains an open question in academic discourse: there is no reliable evidence that price declines following strong increases are predictable, "making it difficult to disentangle irrational price movements from rational market responses to the underlying (and potentially unobserved) fundamentals".

 

A widely used statistical test to determine the explosiveness of a price process suggests that both the benchmark S&P 500 index and the price of gold have entered explosive territory in recent months, the authors said. Historically, such behaviour has often been followed by significant corrections. However, these corrections took place over a variable and potentially long time frame. While the test has reliably detected past bubbles, it provides no information on when the bubbles may burst, the authors observed.

 

The authors also looked beyond statistical properties to monitor other common characteristics of bubbles. According to them, a typical symptom of a developing bubble is the growing influence of retail investors trying to chase price trends. "At times of media hype and surging prices, retail investors can be lured to riskier assets that they would normally shun, compounded by herd-like behaviour, social interactions and fear of missing out. Indeed, measures of retail investors' interest in markets, such as internet searches, tend to surge at times of frothiness."

 

For example, since the beginning of 2025, prices of gold exchange-traded funds have been consistently trading at a premium to their net asset value amid growing retail investor interest. "ETF prices exceeding their NAV signal strong buying pressure coupled with impediments to arbitrage," the authors said in their paper.  End

 

Reported by Abhijit Doshi

Edited by Rajeev Pai

 

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