Can’t Bet On Gold To Continue To Rise At The Same Pace

Global uncertainty caused by either war or any extreme policy, which can surround crude oil prices or tariffs, generally causes excess volatility in all markets. With a plethora of developments taking place in the current context, it is hard to conjecture whether currencies will decline or get stronger. The bond markets remain in flux as central banks evaluate the situation before taking a call on interest rates. The same holds with stocks, which get more volatile and can change direction daily depending on the sentiment. It has been observed that in the last two years or so, one asset which moves in a single direction and tends to thrive in such chaos is gold. This has actually been the story ever since Covid, as it has gained in strength for a variety of reasons.

From an average of $1462/ounce in 2019-20, the price has gone up to $2585/ounce in 2024-25. This is an increase of around 76% over 5 years. However, in 2025, due to the tariff issue, there has been a substantial rise from $2709/ounce in January to $3532/ounce in the first week of September, which is an increase of 30%. This comes at a time when stocks have been volatile, bond yields rising, and currencies moving in no particular direction. How can this be explained? And more importantly, can this be expected to continue?

First, gold is considered to be a safe haven and always does well when there is uncertainty. In the last five years, there have been several periods of uncertainty, including the pandemic, wars, political changes and, more recently, the tariff issue. Therefore, investors diversify their portfolios to include gold. The fact that one can invest through financial instruments makes it even easier from the point of view of transacting in the same. There may be no compelling reason to buy physical gold. The derivative market is active both overseas and in India, and the ‘future’ momentum gets reflected in the physical market too.

Second, gold ETFs have received a fillip as large institutional investments flow into these funds. As ETFs do maintain a backup of physical stock of gold, there has been an increase in demand for the metal, which has kept the price rising in the market. In fact, this has been one of the major sources of demand in the last five years, which was not the case earlier.

Third, central banks have been a big purchaser of gold. Ever since the Ukraine war erupted, there has been talk of de-dollarisation. Central banks have been picking up gold in parallel from the market to build their reserves. As gold does not belong to any country, it is a very good way of diversifying foreign exchange reserves. Some of the central banks, which have bought progressively more gold in the last few years, are from India, China, Turkey, the Czech Republic, Poland, etc. When central banks buy gold, it tends to be of considerable quantity and value, which adds to the price momentum.

Fourth, at the individual level, a boom in prices becomes self-fulfilling as individual households rush in to buy jewellery, trying to beat the cycle. By doing so, they contribute to the spiralling demand, which in turn pushes up the price. India and China are the two biggest consumers of gold. In fact, with interest rates declining in India, there is more reason for households to prefer to buy gold as a long-term investment. There was a gap in spending during the first phase of the pandemic, when there were lockdowns across the globe and it was difficult to buy jewellery. However, subsequently there was the pent-up demand phenomenon, which led to an increase in purchases, leading to the price increase.

The question to ask is how will the price go? The past track record has been impressive in the last five years. But there were periods when gold remained quite grounded. From roughly 2007 to 2015 the CAGR, over a ten-year period, tended to be in double digits every year. This was the period following the Lehman crisis, which acted as a good prop for gold.

However, it is only the upsurge in 2024-25 that has pushed the CAGR once again to the region of around 8%. During the interim period, the price tended to be volatile without any significant movement in either direction. Therefore, it cannot be assumed that the price will continue to increase by leaps and bounds, as has been witnessed in the last 18 months or so.

In the last 10 years, on four occasions there was high double-digit growth in the price of gold, while there were 3 years of negative growth. Hence, it cannot be assumed that the price will increase every year. While it can reasonably be assumed that the global environment will remain volatile for the next year, due to the realignments taking place in global trade and hence currencies, conjecturing beyond may still be tough. Besides, with the price of gold at a level of $3500/ounce, a sharp increase from now on would not look likely in the absence of a major shock.

While the theory of gold delivering good, steady returns would still hold over the longer term, the annual increases could be muted. A lot will also depend on how the ETFs and other investors look at gold as an investment when it comes to buying the metal. The central banks’ acquisition is always in a gradual manner and can be expected to tick along as they continue the diversifying act over the next five years.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal.