Gold rush: Rebalance if your allocation has risen beyond the 10% mark

New investors should avoid the tendency to chase past returns; instead, they may invest in a staggered manner provided they have a 7-10-year horizon

Gold recently surged past the $3,000 per ounce mark in the international market. Investors, both existing and new, should avoid extreme reactions and proceed with caution in the wake of this landmark level being crossed.

 

Key drivers of the rally

 

Trade war: President Donald Trump’s tariffs on trade partners could have several consequences. “These policies could be inflationary for the US. There is also a possibility of competitive devaluation of currencies by exporters to the US. We could also have a mix of the two scenarios. Either or both of these developments will lead to investment demand for gold both from the US and emerging markets,” says Chirag Mehta, chief investment officer, Quantum Asset Management Company (AMC).

 

Growing investment demand: While earlier the rally was driven primarily by central bank demand, that is no longer the case. "In 2025, investment demand has been the primary driver of the rally. Investment demand refers to demand for gold ETFs, and to some extent, bars and coins," says Vikram Dhawan, head of commodities and fund manager, Nippon India Mutual Fund.

 

Central bank demand: Over the past three years, central banks have significantly increased gold purchases. “Over the long term, central banks have on average bought around 400 tonnes of gold annually. In the past couple of years, however, they have bought over 1,000 tonnes annually,” says Dhawan. 

Recently, central banks have resumed aggressive buying. “This is one factor that can drive the rally forward,” says Navneet Damani, commodities head, wealth management, Motilal Oswal Financial Services. 

Central banks continue to favour gold amid geopolitical uncertainty. “The view among them is that it is better to have exposure to something whose supply cannot be controlled by the whims and fancies of a particular nation (as can be done with paper currencies),” says Mehta.

 

Stagflation in the US: There is a possibility of growth slowing down while inflation moves up in the US. “Such an environment will be supportive of gold,” says Mehta. High US government debt, exacerbated by low growth, could further boost gold prices. Additionally, ongoing conflicts, including those in Russia-Ukraine and the Middle East, add to the uncertainty. 

 

Risks to the rally

 

A ceasefire in global conflicts or trade agreements could drive gold prices down. "A resolution of the ongoing wars or trade-related conflicts would be negative for this safe-haven investment," says N. S. Ramaswamy, head of commodities, Ventura.

 

A strengthening US dollar would also weigh on gold prices. Higher prices may reduce demand for physical gold. "Unless this demand slack is picked up by central banks and investment demand, prices could correct," says Dhawan.

 

Some experts warn the rally has been steep. “Such a steep rally is usually followed by stagnation in prices or some correction,” says Damani.

 

A drop in central bank purchases could trigger a correction. “China, which has been buying about 200-500 tonnes annually in recent years, has bought only about 16-18 tonnes in the past few months. It remains to be seen whether it can sustain heavy buying, given its current economic travails,” he says.

 

Profit booking may also lead to a short-term pullback. “Profit booking, too, can result in a short-term correction in the price of gold,” says Ramaswamy.

 

Will the rally continue?

 

Opinions on the rally’s sustainability vary. “The underlying fundamental factors are still very supportive of gold. But given the multiplicity of factors that can affect its price, we expect to see some pullbacks as well,” says Mehta. 

Despite strong performance in recent years, gold holdings in global portfolios remain below post-Covid peaks. “The gold held by investors through ETFs is still 30 per cent lower than the post-Covid peak,” says Dhawan. Increased allocations amid uncertainty could push prices higher. 

Damani believes the rally has been excessive. “The risk-reward no longer favours gold. The possibility of a 8-10 per cent correction cannot be ruled out,” says Damani. 

Ramaswamy anticipates a mild correction of 5-8 per cent, followed by a 10-12 per cent upside.

 

Stick to long-term strategy

 

Financial planners recommend maintaining some gold exposure for portfolio stability. "We advocate an allocation of 5-10 per cent to gold," says Renu Maheshwari, Securities and Exchange Board of India (Sebi)-registered investment adviser, co-founder and principal adviser, Finscholarz Wealth Managers. 

Gold should be viewed as a long-term strategic investment. “Gold cycles tend to be very long, so an investment horizon of 7-10 years is ideal,” says Arnav Pandya, founder, Moneyeduschool. 

Existing investors should review their portfolios. “If the original allocation was 10 per cent, and it is now at a higher level, then you should rebalance,” says Pandya. 

New investors, if stricken by FOMO (fear of missing out) on watching gold cross the $3,000 mark, should avoid the tendency to chase past returns. “The returns witnessed over the past year or so may not be repeated, and you may be disappointed. Invest in the yellow metal if it fits into your asset allocation and financial goals,” says Maheshwari. 

Pandya cautions that investors entering now should have a long-term perspective to withstand a potential downturn, which could also be prolonged.

Criteria for selecting gold ETF 

⦁ Investors need to check the tracking error; lower is better  ⦁ Expense ratio or the annual fee charged by the fund house; lower is better  ⦁ It is better to go with an ETF that has considerable trading volumes, so that the impact cost is not very high if you wish to buy or sell a large amount  ⦁ Track record of the ETF in times of a sharp surge in demand, or a sudden sell-off