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Retail investors are helping drive gold and US stocks towards “bubble” territory, raising the risk of a disorderly reversal, the Bank for International Settlements has warned.
In its latest quarterly review published on Monday, the BIS said that gold and US stocks showed the hallmarks of a bubble, including retail investor “exuberance”, surging valuations and media hype.
Gold has surged 60 per cent this year in its best annual performance since 1979. US stocks, led by a handful of Big Tech companies riding the artificial intelligence boom, are on track for annual gains, with the S&P 500 up 17 per cent and the Nasdaq up 22 per cent.
The decision to sound the alarm over the gold market is striking because the BIS, known as the “bank for central banks” and renowned for its secrecy, helps central banks trade the metal and stores it for them.
“The past few quarters represent the only time in at least the last 50 years in which gold and equities have entered this territory simultaneously,” the BIS noted. “Following its explosive phase, a bubble typically bursts with a sharp and swift correction.”
While the IMF and Bank of England have both recently warned on the danger of a bubble in AI stocks, the BIS also highlighted the role of retail investors in driving up bullion prices and US equities.
Retail investors accounted for the bulk of inflows into gold and US equity funds in the past three months, while institutional investors had been scaling back their holdings in US stocks and keeping their gold exposure flat, the BIS said.
Their growing role in both markets could “threaten market stability down the road, given their propensity to engage in herd-like behaviour, amplifying price gyrations should fire sales occur”, it added.
Inflows into gold ETFs, which include money from retail and institutional investors, are on track for a record year, according to the World Gold Council.
Gold prices have slipped from a record at $4,381 per troy ounce hit in October, and were $4,200 on Monday. This year’s rally has had multiple drivers, including purchases from central banks seeking to diversify their reserves away from the US dollar.
Investor fears over inflation and government debt levels have also sharpened the metal’s appeal as a haven.
Central bank buying has been at historically high levels of around 1,000 tonnes per annum since 2022, but the blistering rally has also forced a handful to sell the metal to stay within their allocation limits.
The gold market has previously suffered boom-and-bust cycles, including in 1980 when prices hit a peak on the back of inflation and the Iran oil crisis.
Prices also surged following the 2008 financial crisis, peaking at $1,830 per troy ounce in September 2011, before falling 30 per cent over the next two years.
On US stocks, the BIS said that the gains for Big Tech companies had “raised concerns about stretched valuations and the risks a price correction would entail for the broader stock markets and the economy”.