The price of gold has been in the news over the last few days due to the anticipated actions of the US Federal Reserve.
The US Fed Chair, Jerome Powell, has indicated that interest rate cuts in the US could start as soon as next month.
However, the situation is complicated if inflation remains a concern.
This has caused a bit of volatility in the price of gold.
So, what is the outlook for the yellow metal? Will it continue to rise?
Let’s find out…
#1 Inflation and Interest Rates
Gold has historically acted as hedges against inflation. Gold’s record in this regard is very good going back 3,000 years.
Inflation has remained sticky all over the world. Although the rate of inflation has declined since it peaked in 2022, it still hasn’t gone back to pre-covid levels. This has provided support to the gold prices over the last few years.
Central banks around the world have raised interest rates to fight inflation. Now, they seem satisfied that inflation will eventually come under control.
Also, central banks are not comfortable with the idea of keeping rates high for so long that it becomes a trigger for a recession. This is especially true when trade wars, tariffs, and geopolitical concerns are the big talking points.
As gold doesn’t pay an interest, it tends to have an inverse relationship with interest rates. Falling interest rates are associated with a rising price of gold and vice versa. This is especially true in the case of US interest rates because gold is a global asset and the US dollar is the world’s reserve currency.
Thus, if interest rates in the US have peaked, and are now on the way down, then gold has some room to go higher.
Investors will have to keep an eye on this trend.
#2 Geopolitical Uncertainty
Recent events related to Ukraine and the Middle East have not assuaged the concerns of investors that geopolitical risks have faded.
The potential for a flare ups in tensions remains high. The chance of a specific flashpoint becoming a trigger for a conflict is an ever present risk.
The situation between India and Pakistan also remains tense.
Gold has always acted as a hedge against such geopolitical risks. Thus, as long as these tensions remain, the gold price will find support.
#3 Emotional Reasons
Finally, there is a mostly under-appreciated reason for the rise in the gold price.
Gold is an emotional asset, perhaps even more than stocks. Whenever the price of gold rises, everyone starts to talk about it.
These conversations create a desire to buy more. Those who didn’t buy at lower prices feel a fear of missing out (FOMO).
They hear stories of people who bought gold at Rs 50,000 per gm and have now doubled their investment at Rs 100,000. This makes them feel they have missed out on a great opportunity.
This feeling of FOMO when the price of gold is surging, is a strong motivation to buy more, especially in ETF form, as it enables quick buying and selling. We have already seen this happening as ETFs have become very popular with retail investors.
Conclusion
Gold has a great long term track record of preserving wealth. Recent events regarding interest rates and geopolitical tensions have clearly re-enforced that view in the minds of investors.
The rest of 2025 could see the price of gold continue to rise.
We believe, gold is a great way to preserve your wealth. It holds up well against inflation. Unlike, stocks, real estate or cash generating businesses, gold does not produce any income. This means its value stems from its ability to preserve wealth.
And that makes it an indispensable part of every portfolio. It makes sense to hold some gold in one’s long-term portfolio.
But it doesn’t make sense to speculate on short term price movements.
Also, while considering an investment in gold, have a time horizon well beyond 2025. Just because prices have gone up recently, doesn’t automatically make gold a great investment.
Do your due diligence.
At Equitymaster, we believe having 5-10% of one’s portfolio in gold, at all times, makes sense.
However, investors should not see gold as a potential substitute for any other asset.
Happy investing.
Disclaimer
This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here…
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