MW These 6 reasons for gold's surge are keeping investors bullish

By Mark Hulbert

Inflation hedge? Risk hedge? Popular explanations for gold's bull market fall short.

Gold investors understandably don't believe there's any mystery about why gold (GC00) has soared in the past year. They offer no shortage of theories to explain gold's price rise.

But I know of no theory that has a statistically significant record of predicting gold prices. So why gold did so well in 2025 can't really be explained. A mystery, in other words.

This mystery should worry the gold bulls. Without a compelling statistical explanation for why gold rose so much, it's impossible to anticipate what it might do this year.

Below is a list of the popular theories that gold bulls believe. None is consistently good as even a coincident indicator, much less a leading one.

1. Gold is an inflation hedge: Perhaps the most widespread explanation for gold's rallies and declines is that it is a hedge against inflation, rising when inflation heats up and vice versa. But as a guide to gold's short- and intermediate-term moves, inflation falls short.

Consider the trailing 12-month change in the CPI's annual rate of change and gold's corresponding trailing 12-month change. Then consider the R-squared of the correlation between these two data points. (The R-squared measures the degree to which changes in one data series explain and predict changes in the other.)

Based on data over the past four decades, the R-squared in this instance is only 1.1%, as shown in the chart below. That means the 12-month change in the CPI's annual rate explains just 1.1% of gold's 12-month change.

Not surprisingly, this low R-squared is not significant at the 95% confidence level that statisticians often use when determining if a pattern is real. This is another way of saying that the change in CPI's annual inflation rate is close to useless as a short-term gold timing indicator.

2. Gold as a hedge against expected inflation: Some gold investors argue that, instead of responding to changes in the actual inflation rate, which we know only after the fact, gold responds to changes in expected future inflation.

To test that possibility, I turned to monthly projections from the Cleveland Federal Reserve's inflation-expectations model. I found no significant correlations between those projections and gold's price. In fact, changes in expected inflation - either at the 12-month or 10-year horizons-have had even less explanatory power than changes in the CPI's annual rate. This isn't to say that inflation has no relationship to gold. But history suggests that this correlation exists only when focusing on long periods - measured over many decades, if not centuries. That was the finding of the study "The Golden Dilemma," authored by Campbell Harvey, a Duke University finance professor, and Claude Erb, a former commodities-portfolio manager at TCW Group.

3. Geopolitical risk: Another popular belief is that gold hedges against geopolitical risk, rising when that risk heightens and vice versa. To test this theory, I turned to a Geopolitical Risk (GPR) Index constructed by Dario Caldara and Matteo Iacoviello of the Division of International Finance at the U.S. Federal Reserve Board. They calculated the index by "counting the number of articles related to adverse geopolitical events in each [of 10 major] newspaper[s] for each month (as a share of the total number of news articles)."

Once again, I came up empty. Trailing 12-month changes in the GPR Index explain just 0.1% of corresponding changes in gold bullion - so low that it barely registers on the chart above.

4. Economic-policy risk: A similar conclusion emerged when testing whether gold is a hedge against economic risk, as measured by an index known as the Economic Policy Uncertainty $(EPU)$ index. Once again, it came up empty.

The EPU index measures the frequency of newspaper articles that contain references to the economy, government regulations and policy, and uncertainty. The EPU's trailing 12-month changes explain just 0.9% of corresponding changes in gold's price.

5. China gold purchases: Another widespread theory ties gold's recent bull market to China's central-bank gold purchases. According to the World Gold Council, China's gold reserves have more than quadrupled since 2000. Plausible as this explanation seems, it's a poor guide to gold's short- or intermediate-term trends. The r-squared of trailing 12-month changes in China's gold reserves and gold's trailing 12-month changes is just 0.6%.

6. Gold ETF net inflows: The data series that is most correlated with gold's price is trailing 12-month net inflows to ETFs that own physical gold. That's not unexpected, since an inflow to those ETFs leads them to purchase more gold, and vice versa. Even here, however, the correlation between inflows and gold's price is not statistically significant at the 95% confidence level.

Coincident versus leading indicators

Not surprisingly, given that none of these theories supports a solid coincident indicator for gold's gyrations, they all fail as leading indicators as well. This is one reason why gold-market timing is so difficult.

This helps to explain why the several dozen gold market-timing strategies that my performance auditing firm has monitored have significantly lagged behind the market. Across all rolling 10-year periods since the mid-1980s for which I have data, the average gold-timing strategy lagged behind a buy-and-hold-gold portfolio by 4.0 annualized percentage points.

The bottom line? Investing in gold is risky - but especially so without any reliable guide to why it does what it does.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Why bonds now look like a better bet over stocks and gold

Also read: Stocks are signaling that another commodities 'supercycle' is afoot in 2026

-Mark Hulbert

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January 12, 2026 13:46 ET (18:46 GMT)

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