Will Gold Lose Its Sheen After a Fast Run-up

While the reciprocal tariffs (announced on April 2, 2025) have been paused for 90 days by the U.S. President, Donald Trump (as announced on April 9, 2025) on most countries, except China, uncertainty is still looming. More than 75 countries, as per Trump, asked for negotiations on reciprocal tariffs which led to the pause. But Trump, as you may know, is mercurial and precipitous. Hence what would really happen after the 90-day pause is hard to tell.

If Trump continues with his economic vandalism, it may be incompatible and ineffectual with the vision to Make America Great Again (MAGA). On the contrary, as many fear, it could raise the odds of the U.S. slipping into a recession and weigh down on global economic growth. Besides it could result in geoeconomic fragmentation, supply chain disruptions, and inflation.

India's Reserve Bank has observed a resurgence of policy uncertainty recently, particularly relating to geopolitics and trade. Geopolitical conflicts, trade wars, and geo-economic fragmentation are perceived as high risks to the domestic financial system, according to the RBI's latest Financial Stability Report.

The International Monetary Fund's (IMF's) recent report on financial stability also highlights that geopolitical risk can affect the prices of financial assets through an increase in uncertainty and disruptions to trade and financial transactions, which can be mutually reinforcing.

As observed by the IMF, on average, major geopolitical events since World War II have triggered a modest and short-lived decline in aggregate stock prices, possibly because of policy reactions to mitigate the adverse effects of these events. But, in some cases, such as the 1973 Arab oil embargo and the 1990 Iraq invasion of Kuwait, the adverse stock market reaction was stronger and more persistent, lasting over several months.

Given that, there could be a colossal impact on asset classes, particularly the high-risk ones such as equities. Trump's tariff tantrums have created a perilous environment for the global financial markets. The impact of geopolitical risks on asset prices may vary across asset classes, sectors, and countries, as per the IMF.

Against the backdrop of the looming uncertainty, gold has turned bold right since the beginning of CY2025, with smart investors turning to it for its trait of being a safe haven and a store of value in times of economic and geopolitical uncertainties.

In CY2025, gold has so far clocked +22.2% absolute returns in Indian Rupee (INR) terms, whereas in the U.S. Dollar (USD) +21.8% (as of April 14, 2025). Today, the MCX gold spot price per 10 grams of gold is Rs 93,000, while in USD terms it is over 3,200 per troy ounce as per the LBMA gold am fixing.

The graph above makes it clear whenever there were looming risks, for example, the COVID-19 pandemic, wars, and military conflicts in parts of the world resulting in geopolitical tensions and volatility in the financial markets, gold has fared better than equities. This is evident from the performance of gold in CY2019, CY2020, CY2022, CY2024 and now thus far in CY2025. In all these calendar years gold has clocked handsome double-digit returns (in INR terms).

You see, investors are not just buying physical gold (in the form of bar, coins, and jewellery) but also choosing Gold ETFs and Gold Saving Funds -- the smart options to buy gold. The discontinuation of Sovereign Gold Bonds (SGBs) by the government (due to high borrowing costs) has also led to higher inflows into gold ETFs and Gold Saving funds. The AUM of gold ETFs in India as of March 2025 has touched Rs 58,888 crore abetted by inflows and mark-to-market (MTM) gains.

[Read: What's Driving Record Inflows into Gold ETFs]

Internationally too, strong inflows into Gold ETFs in March 2025 across regions -- with North America and Europe representing the bulk -- pushed total Q1 inflows to the second-highest quarterly level in dollar terms since 2020, marking a notable shift in investor sentiment amidst volatile markets.

In Asia, China and Japan dominated the demand in March, both likely driven by rocketing gold price performances, according to the World Gold Council (WGC). In India, Gold ETF reported an outflow worth Rs 77 crore as some investors indulged in profit booking with gold prices soaring to new highs.

Global Central banks as well, recognising the looming risks -- on account of steep tariffs, geopolitical tensions, inflation, high debt-to-GDP of certain economies, and the possibility of a global economic slowdown -- have steadily and strategically continued to purchase gold as part of their reserve management. In the last three years, central banks have been strong contributors to gold's performance. This, in turn, also has added a fundamental support to gold.

The Prospects for Gold in 2025

Going forward if major central banks of the world cut their policy interest rates to support growth and liquidity conditions in the system are comfortable, it would continue to work in favour of gold. Mind you in a stagflationary environment (i.e. growth faltering and inflation sticking around), usually, central banks refrain from increasing interest rates (as that comes in the way of growth).

The WCG observes that willingness to hold and reluctance to sell -- given current extreme policy uncertainty -- could generate real momentum. By historical standards, the current rally isn't particularly large or long. The Trump 2.0 administration ostensibly is favouring a weak USD and the uncertain effects of tariffs could serve as a tailwind for gold.

So, the fundamentals for gold look more solid. During periods of severe economic slowdown or recession in the past, gold has demonstrated its sheen and outperformed equities.

The World Gold Council (WGC) has also expressed that given gold's strategic significance and the economic uncertainties that continue to look ahead, investors should carefully consider the portfolio benefits gold can offer in 2025 and beyond.

The long-term uptrend exhibited by gold cannot be ignored and highlights the importance of owning gold in the portfolio.

In the last decade, gold has clocked a CAGR of +13.3% as of April 14, 2025, and since India's independence a CAGR of nearly +9.4% as of April 14, 2025.

A fact is unlike financial assets, gold is a real asset -- meaning gold does not carry credit or counterparty risk. Even a stronger U.S. Dollar typically seen during the stagflation period hasn't dampened the sentiments toward gold, according to the WGC.

Therefore, it makes sense to strategically allocate around 10% to 15% of your entire investment portfolio towards gold and hold with a long-term view (of over 5 to 10 years) by assuming moderately high risk. Invest in gold the smart way --in the form of Gold ETFs and/or Gold Savings Funds.

If you have been already investing in gold and your allocation has exceeded 10-15% of your portfolio amidst the rally it would be prudent to book some profit to bring back the portfolio to the desired allocation.

When investing in gold one should be mindful of the risks involved. This is because, like any other investment, gold price too can witness volatility, short-term corrections, as well as phases of stagnant growth. The elevated gold prices may dampen the demand given that the price has run up faster, and therefore some retracement in the near term cannot be ruled out.

[Read: Gold Price Touch Record Highs. Should Investors Buy More or Sell?]

Remember that past instances of superior performance may not be sustained in the future. Thus, invest sensibly and strategically. Do not get carried away.

Be a thoughtful investor.

Happy Investing!

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.