The almighty gold corrects: What’s next?

Wasn’t it a monumental decline for all things gold yesterday!

Only a week ago, gold, silver and mining stocks were rallying in seemingly irresistible form. Gold approached US$4,400 an ounce, silver broke above US$54, while the ASX Gold Index [ASX:XGD] traded at above 17,500 points. At the time, their year-to-date performance was 66%, 79%, and 112%, respectively.

For a safe haven asset, gold returning 66% in around ten months is unheard of, even unbelievable.

Even mainstream media is airing footage of people lining up and down Martin Place outside ABC Bullion’s flagship store as they buy and sell physical bullion.

I actually walked past the store same time last week, having been in Sydney for the 2025 Australian Gold Conference from Monday to Wednesday, and appearing at the Ausbiz studio on Thursday morning to discuss gold’s spectacular run.

I saw the queue and recorded it to confirm it’s not just a bunch of gold bugs trying to talk up demand:

This wasn’t just something that happened in Sydney, it’s apparently happening worldwide.

Are we seeing a bubble in gold and precious metals?

The signs seem to suggest that.

And if this is indeed a bubble in precious metals, are we currently watching the bubble burst given the sharp decline in prices on US trading on Tuesday and last night?

That’s indeed a US$28 trillion question…

A pleasant surprise at the
2025 Australian Gold Conference

While I’m talking about last week’s developments in gold, I can’t go past talking about the 2025 Australian Gold Conference that took place in Crown Towers Barangaroo in Sydney.

It was great to see a number of our Fat Tail Investment Research readers attend this event. Like last year, it was a good annual reunion!

Here’s a few pictures from the event:

From left to right: David, Alex, myself, and Dr Andrew

Woody and I drinking red wine #NotBullion&BordeauxHour

Sitting on a panel discussing how to use the Lassonde Curve to identify value among junior gold stocks (left – Ausenco’s Chris Morris, me, Saturn Metals MD Ian Bamborough, and Victor Smorgon Group’s Cameron Judd)

In hindsight, you couldn’t have picked a better timing for the event as it took place while gold and silver soared to record highs at an astounding pace. Gold only breached US$4,000 at the end of the week prior to the event. However, it quickly sliced through US$4,100, 4,200, and 4,300. Everyday, the attendees woke up to seeing a new high. It was the talk of the event.

Now you’d think that in such an event, people would’ve become ecstatic, even losing their heads over this development, right?

But you’d be disappointed to find out that this wasn’t the case!

Despite the spectacular moves for gold and gold stocks, several presenters discussed the need to manage risk and take profits. Even outside the auditorium, there were delegates gathering and talking excitedly about their portfolio returns. But almost everyone mentioned how they’ve pocketed some gains already.

For this reason, I could say that there are hints of euphoria, but the animal spirits aren’t evident in this crowd.

So if you’re looking for reasons to say a gathering of giddy-eyed gold bugs is the mark of the top for gold, I’m sorry to disappoint you.

Gold stock slump but
fundamentals remain solid

Perhaps you might want to point the finger for gold’s bubble on the near-vertical ascent of the ASX Gold Index [ASX:XGD] dragging it up to overvalued territory:

That’s a reasonable call. Since its recent low on 1^st August, the established ASX-listed gold producers and developers have jumped by almost 70%. That’s on top of its 25% move since the start of this year.

The setup is almost a textbook example of a bubble.

Have investors thrown valuation out the window, only chasing momentum to try to be the bigger fool?

Well, not really. And I’m not saying that just because I’m a gold stock enthusiast and am deeply invested in them.

In my series Strategies for Successful Gold Investing last year (you can find the first of the series here), I laid out the principles of valuation and mindset for gold stock investing. I also pointed out how the value of gold mining companies aren’t merely a function of the price of gold, but the relative price of gold and oil. You can read about my reasoning in this article of the series.

While many talk about PE ratio, gold-silver ratio, and enterprise value to reserves and resources multiples when discussing gold stock valuation, I focus on the gold-oil ratio. I’ve found that when this ratio is higher, it implies gold producers are earning better operating margins. This justifies a higher valuation from investors. The reverse applies.

While gold has run much higher, oil has gone backwards, causing the gold-oil ratio to trade at elevated levels:

If I take this ratio’s history back a few more years, you’ll see how it’s trading at unprecedented levels:

Note that the only time this ratio exceeded today’s level was briefly in April 2020 when oil went negative. That was an exceptional time, but a different form of exceptional than what we’re seeing today.

There’s no doubt that the rally we saw in gold stocks in the past few months seems a little overdone. However, the fundamentals based on the gold-oil ratio continue to support the price action.

Should conditions prevail as they do, this correction in gold and gold stocks may allow value to re-emerge with gold stocks.

Therefore, if you’re looking for proof that this is a gold bubble going out of control, then this mightn’t be what you hoped for.

A winning strategy, if you choose to take it

I could point you to gold’s slump being driven by geopolitics and war. The latest developments in Ukraine and in the Middle East appear positive from a global perspective (less wars and hopefully more stability). These could cause gold to ease.

However, that’s just a short-term driver for gold. Meanwhile, nations and central banks continue to conjure up debt and deficits in a vain attempt to dig their way out of bad financial and social management. All these are going to benefit gold in the long-run.

In short, I’ve presented a somewhat biased view to support the case for gold. The current correction we’re seeing may get worse before it turns around. However, it seems like the odds are in favour of gold.

It’s now over to you – do you want to unleash the power of gold in your portfolio? If you do, consider having a game plan. It’s rough conditions out there and the herd doesn’t have the right idea, or any idea. They’re going with the flow, and feeding the wallets of those who can discern value from price.

Check out The Australian Gold Report now, and find out how to build your precious metals portfolio and uncover the right mindset.

This dip could be your chance to get in! Seize the moment!