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Forged in a Cosmic Furnace
Summary
Gold is formed in two extreme cosmic events: (i) the explosive deaths of massive stars in supernovae; or (ii) two neutron stars (remnants of supernovae) colliding. The intense heat and pressure created by these events fuse lighter elements into heavier ones including gold. Once formed, gold atoms mix with interstellar gas and dust, eventually coalescing into planets like Earth. This process helps explain why gold is rare, and impossible1 to replicate with current technologies2. This also forms the basis of investor perceptions around its properties as a store of value, protector of purchasing power and numeraire candidate for pricing all assets.
In this note, we examine catalysts for the strong outperformance of gold and argue the rally can extend on longer time scales as gold’s underlying secular drivers remain solid. Specifically: (i) gold’s role as a store of value, particularly in the current policy environment; (ii) increasing gold holdings by global reserve managers as an alternative to Treasuries and the dollar; and (iii) new demand arising from the crypto complex.
Store of Value
Bond traders use a heuristic called the rule of seventy-two. Divide annual return into seventy-two and we derive the approximate time to double the investment. In the case of a negative return or a cost, it gives us the approximate time of halving our investment. In a world of 3% inflation, it takes approximately 24 years3 for purchasing power to be cut-in-half. As the quotes below suggest, inflation is a punitive hidden cost on societies.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” – Alan Greenspan
“Inflation is a far more devastating tax than anything that has been enacted by our legislatures.” – Warren Buffet
Source: Bloomberg. Data as of October 2025
As Figure 1 the left chart shows, gold recently broke its inflation adjusted highs from the 1980s. For our younger readers, Paul Volcker, the former Fed Chair was forced to raise short-term rates above 20% to re-anchor inflation and inflation expectations. Inflation spiraled out of control in response to the Middle East forming a cartel to control oil prices. Figure 1 the right chart shows the purchasing power of the S&P 500, Euro, Sterling and Yen in gold terms since 2000. The erosion of buying power is obvious, with currencies losing over 90% of their value versus gold. The S&P 500 held up better but still lost 60% of its buying power against gold. The charts are clear: inflation is taxation without legislation4.
If the pernicious impact of inflation is well understood, why have policy makers historically opted for inflationary policies? One possibility is the difficulty of winning elections on a platform of austerity. In the US, we have to go back three decades to Bill Clinton’s first term in the early 1990s when 5% deficits were considered unsustainable. In the current environment, several countries are following the US playbook with expansionary fiscal policies and as we have seen in France for example, attempts at austerity are politically infeasible.
We are in a highly stimulative regime of global fiscal largesse with money and credit expanding. We are also in a regime where the US dollar is the dominant reserve currency. A ‘privilege’ that allows the US to extend its policy reach via payment networks that transact in dollars. With the risk of rising inflation and higher non-economic risks of holding dollar reserves, countries are considering alternatives to the dollar. The list of potential investment candidates is short: precious metals including gold and silver, the currencies of fiscally conservative countries like Singapore and Switzerland, real assets and crypto currencies with fixed supply including Bitcoin. Investors are increasingly searching for assets that protect purchasing power and add valuable diversification to portfolios. Gold offers these properties, and demand is rising from various investors including reserve managers, pensions, and individuals.
Gold Holdings
Who is buying gold? In the charts below we show accumulation by reserve managers and central banks where gold is rising in importance versus US Treasuries as a core reserve holding. The data includes Treasuries used as collateral in Central Bank operations, excluding collateral shows gold about to surpass Treasury holdings. This includes valuation effects and outright demand. Reserve managers seeking to de-dollarize and protect purchasing power are the marginal buyers of gold and an important driver of its appreciation. China is playing an increasingly important role and recently started courting countries to store physical gold on the Shanghai Gold Exchange5. Not all Central Banks held onto gold reserves, Canada fully liquidated its gold reserves over the period from 1987 to 2016, and the Bank of England reduced its gold reserves by 58% over the period from 1999-20026. Australia, Switzerland and the Netherlands also cut gold holdings in the 1990s and early 2000s. The US holds the world’s second largest official gold reserves, following the Euro area, managed by the US Treasury and stored primarily in Fort Knox. The value of US gold reserves is reported at the statutory price of $42.22 per ounce ($11 billion) which was set in 1973. The Treasury Secretary has stated7 there are no plans to revalue gold reserves to prevailing market prices ($1 trillion), but there is speculation the Administration could use the windfall to fund fiscal projects including issuing Treasury debt backed by gold.
Source: Bloomberg. Data as of Q1 2000.
Crypto Demand
Investing in the last few years has become increasingly mimetic, with stories and virality playing an important role in short-term price formation. Shifts in investor behavior create new patterns and leave a residual memory in prices – effects systematic firms are well placed to capture. Recently, we have seen stablecoin issuers advocating for larger gold holdings, with Tether calling gold the ‘natural bitcoin’8 and acquiring $8.7 billion gold bars9 stored in a Swiss vault. Tether is also exploring investments in gold miners. Back to mimetics, if Tether can convince a technologically savvy crypto investor base that gold is an attractive complement to various crypto currencies, adoption will increase, including as a core reserve asset in stablecoin treasuries.
The stablecoin business model is an interesting one. Tether pays no interest to investors on fiat deposits and posted collateral. For example, an investor deposits dollars or euros with Tether, receives a stablecoin and uses the coin to transact in the crypto complex.
Tether invests these reserves in the fiat system. With a balance sheet of around $168 billion, it is currently one of the largest holders of Treasury Bills and generated $5.7 billion in profit10 in the first half of 2025. The current Administration strongly supports the crypto industry, and the Treasury Secretary has stated11 that stablecoins are an important funding source for the US Government. Recall the Treasury’s issuance is weighted to Bills and the short end. One issue with Tether’s business model is that it relies on rates staying high and investors accepting no interest income. We are already seeing new stablecoin entrants offer positive yield to gain market share and the Administration is pressuring the Federal reserve to lower interest rates.
Diversification Properties
Gold plays an important role in portfolio diversification. In Figure 3 we show gold’s relationship to the S&P500 and a diversified bond index (Bloomberg US Aggregate) since the mid 1970’s. We split the data into decades to show sensitivity to different regimes and compute estimation errors using a non-parametric bootstrapping approach. The results suggest that gold adds diversification to indexed portfolios holding equities and bonds.
We remind readers that forecasts of returns, volatilities, and correlations are statistical estimates with error bounds. Using point estimates of these quantities as gospel when making investment decisions while ignoring the underlying statistical properties is unscientific. Without adequate correction, large estimation errors can arise from several sources including the non-Gaussian nature of prices (e.g. fat tails, jumps, discontinuities), the regressive nature of the errors themselves (error estimates are subject to error), the difficulty in estimating a large number of parameters (more estimates, more error) and the non-stationarity of markets (e.g. regimes).
Figure 3: Gold, S&P500 (Equity) and Bloomberg US Agg Index (Bonds) Correlations. Monthly data. Figures in brackets show 95% confidence intervals using non-parametric bootstrap. Start: February 1976. As of October 6th, 2025. Source: Bloomberg
Takeaways
- Gold’s rally can extend as secular drivers remain strong.
- We are in a highly stimulative regime of global fiscal largesse with money and credit expanding.
- The US dollar is the dominant reserve currency and extends US policy reach via payment networks that transact in dollars.
- With the risk of inflation rising and higher non-economic risks of holding dollar reserves countries are considering alternatives to the dollar.
- The list of potential investment candidates is short: precious metals including gold and silver, the currencies of fiscally conservative countries like Singapore and Switzerland, real assets and crypto currencies with fixed supply including Bitcoin.
- Investors are increasingly searching for assets that protect purchasing power and add valuable diversification to portfolios. Gold offers these properties, and demand is rising from various investors including reserve managers, pensions, and individuals.
1 Nuclear transmutation is theoretically possible but wildly uneconomic.
2 As opposed to diamonds, which are now replicable with technology.
3 Halving time with annual compounding: t = ln(2) / ln(1.03) ≈ 23.45 years
4 Milton Friedman
6 World Gold Council
8 https://www.ft.com/content/135fb3dd-2395-4f04-8cc6-7fb0e87cd092
9 As of September 5th 2025.
10 https://www.ft.com/content/135fb3dd-2395-4f04-8cc6-7fb0e87cd092
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