Gold: Speculation or Fundamentals?

The yellow metal has surged significantly since the beginning of 2024, drawing plenty of attention from investors, analysts and market commentators alike. Gold prices climbed from under $2,000 an ounce at the start of 2024 to over $3,000 an ounce in 2025.

Investors typically fall into one of two camps when it comes to gold. On one side are the ardent “gold bugs”. For them, gold is more than just a commodity – it’s a cornerstone of financial resilience. They view gold as a store of value and a safe haven, especially in challenging and uncertain times. Geopolitical uncertainty can also drive gold prices. During times of conflict or economic crisis, gold tends to attract demand as a “crisis commodity.” Ancient civilizations hoarded gold for wealth, and today, central banks hold it as a reserve asset. Central bank gold buying is one of the reasons for the recent gold price rally. Unlike paper money, which central banks can print endlessly, gold has a finite supply. Advocates also point to gold’s historical role as a hedge against inflation and currency devaluation, as well as its low or negative correlation with stocks and bonds, which offers valuable diversification. Gold often rallies during periods of low interest rates or declining real yields. When investors can’t earn a reasonable return from bonds or savings accounts, non-yielding assets like gold become more attractive.

Cultural demand of gold adds another dimension: in countries like India and China, gifting gold jewelry during weddings and festivals is deeply ingrained. Gold in these societies is not just ornamental – it signifies prosperity and financial security. To sell gold is often viewed as a last resort, a sign of hardship. Together, India and China account for more than 60% of global jewellery demand.¹ Growing up in India, I saw this cultural attachment firsthand, especially in how it was passed on through generations. Festivals like Diwali weren’t complete without someone in the family buying at least a small gold coin – a symbol of good fortune. 

On the other side are the skeptics, who see gold quite differently. To them, it’s a shiny metal with limited practical uses beyond jewelry and in some electronics. It’s not a productive asset. It doesn’t generate any cash flow, making it hard to value the commodity. Its price is primarily dependent on the measure of fear in the society. Gold is only worth what the next buyer is willing to pay for it. Profiting from gold means selling it to someone else at a higher price – essentially betting on emotions rather than economic fundamentals.

The views of the two camps of investors are often deeply entrenched and it’s rare for one camp to persuade the other. The well-renowned investor Howard Marks, captured this divide well when he wrote:

“My view is simple and starts with the observation that gold is a lot like religion. No one can prove that God exists … or that God doesn’t exist. The believer can’t convince the atheist, and the atheist can’t convince the believer. It’s incredibly simple: either you believe in God or you don’t. Well, that’s exactly the way I think it is with gold. Either you’re a believer or you’re not.” ²

At Nexus, we invest in high-quality businesses with strong competitive advantages, solid cash flow, good growth potential and reasonable valuations. These are elements we can analyze. Our analysis might not always come up with the correct answer, but our investment decisions are based on analyzing economic fundamentals. When it comes to assessing gold’s appeal, we don’t know how to analyze whether people will want more of it due to fear or anxiety. In our view, the answer is nothing more than speculation.

That’s not to say all investors should ignore gold. A small allocation may make sense for some. But for us, the inability to reliably value gold or its producers makes it a difficult fit for our core investment approach. We focus on what we can understand, and gold doesn’t lend itself well to that framework.

It’s hard for gold mining companies to build a durable competitive advantage. The process of mining and selling gold is well known, and the product is mostly the same – only the grade of the ore varies. At most, a gold mining company can have a lower cost of production than its competitors because of a favourable mine location or better operational efficiencies. The cash generation of these companies depends on the price of gold. They would generate a higher amount of cash when gold is at $3,000 an ounce as compared to $2,000. Valuations tend to follow that cash flow, but it’s not always clear whether the stock is pricing in $2,000 gold or $3,000. 

Unlike companies that make software or provide healthcare services, long-term demand for gold hasn’t really grown much. So, the only real “growth” for these companies often comes from a rising gold price rather than selling more gold. 

We’re not against owning gold companies, but they usually don’t check enough boxes to meet our investment criteria. Their earnings are often tied to swings in gold prices rather than durable business fundamentals, making them less predictable. We prefer businesses with clearer paths to long-term value creation.