Yellow metal: Maintain allocation; tariff battles may sustain bull run

The price of gold climbed Rs 200 to breach Rs 83,000 per 10 grams for the first time on January 24. Robust demand, macroeconomic uncertainties, and geopolitical tensions are some factors driving the yellow metal upward.

 

Central bank purchases 

Central bank buying has played a pivotal role in this rally. “Central banks usually purchase about 400 tonnes of gold annually. However, in 2022 and 2023, they bought over 1,000 tonnes each year,” says Vikram Dhawan, head of commodities and fund manager, Nippon India Mutual Fund.

 

Geopolitical events, including the Ukraine war, Middle East conflicts, and tensions between major economies like the United States and China, have heightened market volatility. “Statements from President Trump advocating global interest rate cuts and raising tariff threats have created an uncertain economic environment, further boosting gold prices,” says Manav Modi, analyst at Motilal Oswal Financial Services Limited (MOFSL).

 

Sustained physical demand 

Despite rising prices, the physical demand for gold remains strong. “India and China together account for approximately 50 per cent of global physical gold demand, primarily for jewellery,” says Dhawan.

 

However, investment demand has lagged. “Gold exchange-traded fund (ETF) holdings globally have declined by 20–30 per cent post-COVID, though they have seen significant growth in Asia, especially in India,” he adds. Renewed investment demand amid currency volatility or monetary policy uncertainty could drive prices further up.

 

President Trump’s call for immediate rate cuts and a low-interest rate environment has also boosted gold’s attractiveness. “A low-interest rate environment coupled with a weaker dollar index creates a favourable backdrop for gold,” says Deveya Gaglani, senior research analyst, Axis Securities.

 

Trump’s “Make in America” initiative, along with tariff threats and the possibility of trade wars, has also driven investors towards gold. “Trade wars and economic uncertainty often drive investors toward gold, given its proven reliability as a store of value during turbulent times,” says Gaglani. 

 

Potential headwinds 

Rising prices may affect the demand for physical gold. “As gold prices rise sharply, demand for jewellery, small bars and coins tends to stall,” says Dhawan.

 

Competition from cryptocurrencies could also dampen demand. “The growing adoption of cryptocurrencies could divert institutional money away from gold,” says Gaglani. According to Modi, a hawkish tone from the Federal Reserve or a strong labour market could prevent gold from achieving another year of stellar performance.

 

Price momentum in second half

  Experts predict that while the first half of 2025 could see subdued price growth, price momentum could resume in the latter half. A repeat of the financial market volatility seen during Trump’s previous term could further support gold. “We anticipate that gold could deliver a return of approximately 12–15 per cent in 2025,” says Gaglani.

 

Diversify portfolio

 

An allocation to gold is a must for portfolio diversification and as a hedge against equity market volatility. Gaglani advises new investors to allocate 10–15 per cent of their portfolio to gold. Modi highlights that price dips during the first half of the year would present buying opportunities.

 

Existing investors, too, should follow a similar strategy. “Maintain existing investments and gradually invest more during market corrections of 5–6 per cent,” says Gaglani.

 

Stick to regulated products. “ETFs allow participation in price movements without directly holding physical assets while mutual funds offer flexibility through systematic investment plans,” says Dhawan.

 

Finally, spread your investments over time to manage risk. Dhawan warns against using gold for speculative trading.