Gold’s strong third quarter has persisted into the fourth, and on October 7 the price of the metal eclipsed the psychological threshold of $4,000/oz for the first time ever.¹

Up about 50% year to date, the gold price is climbing at a rate not seen since 1979, a year in which gold increased 144% amid a backdrop of double-digit inflation rates, a weakening dollar and geopolitical flashpoints that included the Iranian revolution and the Soviet invasion of Afghanistan.²

Investors have their own unique convergence of concerns to reckon with today, including high sovereign debt levels, monetary policy uncertainty, attacks on Federal Reserve independence, disruptive trade policy, shifting fiscal policies and heightened local and geopolitical tensions. A range of market participants have turned to gold in response to the uncertain backdrop. Net purchases of gold by global central banks have been running at very high levels since 2022, if slowing somewhat in the face of record-high nominal prices, and demand for physically backed gold exchange-traded funds (ETFs)—which capture investment demand from both institutional and individual investors—has picked up meaningfully this year.³

While gold’s rally over the past 18 months has been impressive, trees don’t grow to the sky. In our view, the key risk to the gold rally at this point is the potential for recession. While recessions historically have been positive for the price of gold over the medium to long terms, the onset of economic contraction can have negative implications. We saw this during the brief but sharp Covid-related recession in 2020 as well as 2008–09 recession associated with the global financial crisis. In both instances, however, gold’s value as a potential hedge against adverse events ultimately reasserted itself after an initial period of price weakness.

While the Federal Reserve joined the rate-cutting party in mid-September, competing narratives about the path of the US economy and inflation remain.

Persistently high equity valuations imply markets currently are pricing in a Goldilocks scenario. In this version, corporations continue to shoulder most of the tariff-related price burdens—insulating consumers from the worst of the impacts—while at the same time ramping capital expenditures thanks to tax breaks that encourage the expansion of domestic production capabilities. This dynamic gives the Fed room for additional rate cuts amid massive fiscal deficits, leading to a further steepening of the yield curve that supports equity markets, GDP growth and corporate earnings.

A more bearish viewpoint likely would suggest that tariff-related inflation pressures have yet to fully work their way through the system. Corporations likely will begin to pass along a larger share of higher prices to consumers as margins continue to compress, however, further weighing on lower-income consumers already feeling the effects of a sluggish “no-hire/no-fire” labor market. The Fed’s hands tied by persistent price pressures the potential for stagflation emerges amid faltering corporate earnings.

The outlook abroad, in contrast, appears less path dependent. With price multiples more consistent with historical averages and visible catalysts for earnings growth, a number of non-US markets, in our view, may present attractive alternatives for equity investors.

In Europe, for example, increased defense spending across the continent should bolster growth broadly. Notably, Germany has taken steps to leverage its fiscal space by permanently exempting defense spending from its constitutional debt brake and creating a €500 billion infrastructure fund; leading companies subsequently pitched in with a “Made for Germany” investment drive worth at least €100 billion by 2028.¹ In Asia, corporate reform in Japan continues apace and Korea more recently has introduced its own plan to improve governance. Certain emerging markets, meanwhile, are demonstrating classic outperformance amid Fed easing and the potential for a reemergence of the carry trade in the face of softer US dollar.²