Gold price has finally breached $2900 per oz. Is Gold overbought? Or does the latest rally indicate special circumstances? How to make sense of the unprecedented Gold rally that we have been seeing for the past few years.
There are some experts who firmly believe Gold is overbought, and that a lot of froth exists in the current price of Gold. The basis for this viewpoint is that Gold is a non-yielding asset. The safe haven pricing of Gold and the usage of Gold in the jewelry industry does not explain completely this unprecedented stocking of Gold. It is important to consider this viewpoint even if someone is bullish on Gold.
But what has been different in the last 5 years? During the sub prime crisis in 2008-09, the mainstream investors fully acknowledged the role of Gold as a safe haven and much literature has been written on Gold since then. The biggest selling / marketing point is that Gold has withstood the test of time. For centuries, governments, individuals relied on stocking up Gold during turbulent times and Gold has acted as not just a carrier of value, but also as a carrier of wealth across generations. While this may or may not be factually true, the commentary definitely built the image of Gold. Subsequently, the mainstream investors traded heavily in Gold, used it as a hedging instrument. While this is the story with the institutional investors, the Central Banks traditionally have been accumulating Gold during turbulent times and there are historical instances where Gold Reserves proved useful for bailing out economies. In 1991, when India faced Balance of Payments crisis, pledging 67 tons of Gold as collateral helped India secure a $2.2 billion loan from the IMF. This reliance on Gold reserves by the Central Banks has not changed.
A critical turn of events happened when COVID impacted world economy. All the lockouts, the turbulence in the economies due to the lockouts had a heavy impact on the institutional as well as individual investors. Subsequently, pumping of money into the economies resulted in rise of inflation across US and some other developed countries. While the Central Banks' decision to increase interest rates to counter the inflation did increase Treasury yields, the situation was still ideal for a continued rally of Gold. And as the Central banks turned dovish and started reducing interest rates, Gold was preferred over Treasury bonds by institutional investors. While this is the picture of the Fiscal and Monetary policies affecting Gold price post COVID, the uncertainties related to global balance of power - the increasing influence of China, US governments either tilting far left OR far right, Russia-Ukraine war, situation in Gaza all added to a sense of turbulence. As 2025 dawned, the era of US tariff regime, and trade wars seem to have set and it continues the sense of turbulence. When we look back to the period between 2020 and 2025 after a decade, we may view this period as a significant one establishing new norms in the World Order.
It is anybody's guess whether the continued rally of Gold is justified OR is the froth theory the correct representation. How to view Gold under these circumstances from an investment perspective?
Broadly, betting all one's money on Gold should be discouraged. While, all the above debate on Gold should be considered, there are chances that Gold can sharply decline. However, the performance of Gold and the performance of security markets would not have a significant correlation. What this really implies to the average investor is - diversification, asset allocation. Assuming Gold will keep touching the roofs or vice versa and basing investment decisions on such assumptions is not recommended. With lessons from the past, assigning probability of occurrence of either scenario needs to be factored in, overall investment goals and risk appetite needs to be the guiding factor for the allocation of Gold in one's portfolio.
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