"Central bank's central bank" warns of gold price bubble! For the first time in 50 years, the stock market and gold are overheated and may crash

The Bank for International Settlements (BIS) has rarely warned that gold prices are entering an “explosive zone” at the same time as the stock market, the first double bubble in at least 50 years. Shin Hyun-sung, head of the Monetary and Economic Department of BIS, pointed out that gold prices have deviated from the historical model of safe-haven assets and have become more speculative assets. After a bubble goes through an explosive phase, it usually has only one ending - a sharp and rapid correction, referencing the 20-year bear market after the gold price bubble burst in 1980.

Double bubble warning signs for the first time in 50 years

! One-year trend chart of gold and US stocks

(Blue is the price of gold, red is the S&P 500 index, source: Trading View)

The past few quarters have been the only time in at least 50 years that gold and stocks have entered the so-called “explosive zone” at the same time. Technology stocks (especially AI concepts) and gold are flying in the sky at the same time, and the last time it appeared was back in an extremely long time. The BIS warns: “After a bubble goes through an explosive phase, it usually has only one ending - a sharp and rapid correction (bursting).”

This double bubble is far more dangerous than a single-asset bubble. Traditional financial theory believes that gold should have a negative or low correlation with stocks. When the economy is booming, investors chase risk assets such as stocks, and demand for gold declines; When there is an economic downturn or geopolitical tensions, investors withdraw from stocks and turn to gold for safe-haven activities. This seesaw effect allows portfolios to hedge stock market risks by allocating gold.

However, the current trend of gold and US stocks is surprisingly synchronized, completely breaking the traditional negative correlation. This anomaly shows that the market has entered a state of extreme speculation, and investors no longer allocate based on the intrinsic characteristics of assets, but simply chase price increases. When all assets are rising, it means that the market is flooded with excess liquidity and excessive optimism, which is typical of the eve of a bubble burst.

Historical experience provides a brutal reference. After the gold price bubble burst in 1980, gold plummeted from $850 to $250 an ounce, and it took a full 20 years to retouch its previous high. This prolonged bear market has been devastating to a generation of investors. While the process of correcting can be lengthy, “overheating at the same time” itself is a huge red alarm.

Red Flags of Retail FOMO Replacing Institutional Risk Aversion

BIS data shows that gold prices have climbed by about 20% since early September, and most of the capital flows do not come from thoughtful institutional asset allocation, but from “trend-chasing investors”. To put it simply, it is retail investors who see the price of gold rising and the media hype more, and rush into the market for fear of missing out (FOMO). This upward momentum comes from two aspects: the expectation of interest rate cuts emboldens investors, and the illusion of a “soft landing” in the economy makes the market feel that the risk appetite is justified.

Retail funds have accelerated their inflows into the gold market through channels such as ETFs, pushing gold prices to reach multiple all-time highs in 2025. However, retail-driven bull markets are often extremely fragile because retail investors’ mood fluctuates wildly and is easily influenced by the media. When gold prices begin to pull back, retail investors usually panic sell, resulting in losses far beyond fundamental support levels.

Shin Hyun-sung pointed out: “Gold prices are now rising in tandem with other risk assets such as stocks. It has deviated from its historical model as a safe-haven asset and has become more of a speculative asset.” This change in nature means that investors can no longer assume that gold will provide protection in the event of a stock market crash, as the two may fall in tandem.

Three dangerous characteristics that drive up gold prices by retail investors

Chasing Rises but Not Value: Retail investors buy based on price increases rather than fundamental analysis, lacking holding conviction when the trend reverses

Leverage Usage Universally: Participation through gold ETF leveraged products or futures amplifies systemic risks and liquidation pressures

Herd Effect Significant: Retail investment decisions are highly correlated, triggering a stampede when panic spreads

BIS emphasized that although there were indeed institutions in the early stages of the rebound in terms of hedging, the main force that frantically pushed up gold prices after entering the market turned out to be retail investors. Everyone is grabbing a lottery ticket, not buying an insurance policy. This speculative shift has caused gold to lose its core function in investment portfolios.

The cascading threat of the disappearance of the U.S. Treasury facility spread

In addition to gold and stocks, the BIS also warned of an anomaly in the global debt market. From September to November, developed countries issued “massive” debt, which led to the disappearance of “convenience spreads”. What does this mean? In the past, U.S. Treasury bonds were regarded as a “VIP ticket” in the financial world because they were extremely safe and easy to use, and investors were even willing to take less interest (i.e., additional fees for loans to the government) in order to hold them.

But now, because there are too many treasury bonds issued and the market is indigestible, this “VIP premium” is gone. Shin Hyun-sung said: “Today, the convenience spread no longer exists.” This means that hedge funds have begun to exploit interest rate swaps for frantic carry trades, further exacerbating the fragility of the financial system. Swap spreads turned negative to -26, meaning that the market believes that holding U.S. government bonds is more “troublesome” than holding contracts in private banks, which is extremely rare.

This bond market anomaly forms a dangerous chain relationship with the gold price bubble. When U.S. bonds lose their attractiveness, funds need to find new safe havens, and gold becomes one of the options. But if this inflow is based on the logic of “relatively not so bad” rather than “really safe”, then once there is systemic risk in the market, gold and US bonds may be sold off at the same time, and investors will find nowhere to escape.

Investors’ Triple Risks and Response Strategies

The BIS report does not tell investors to sell all gold immediately, but reminds that when gold starts to fluctuate like technology stocks, it is no longer the stable ballast stone. While enjoying the book wealth brought by bubbles, the exit can be very crowded when the music stops.

For investors who hold a large amount of gold, they should reevaluate their allocation ratio. If gold accounts for more than 20% of the portfolio and the purchase cost is close to the current price, it is recommended to consider partial profit-taking. For those on the sidelines, the current price is not suitable for large-scale positioning, and if you really want to allocate gold, you should wait for a clear technical correction or fundamental catalyst. A more cautious strategy is to open positions in batches rather than heavy positions all at once.

Don’t think of gold now as a “safe haven” for absolute safety, which is at the heart of the BIS warning. When central banks’ central banks issue such clear warnings, ignoring it can be extremely costly.