Why Gold Price is Rising

The price of gold has been on fire recently.

On Wednesday, 5 February, the price of gold per 10 gm hit Rs 87,000. At the start of the year, the price was around 78,000.

90k isn't far away. Talk of 100,000 is doing the rounds.

In the global market, gold has hit US$ 2,900 per ounce. It's up 11% already in 2025.

So, what explains this surge?

Why is the yellow metal in such a strong bull market?

Let's find out...

#1 Fear of Trade Wars

In a nutshell, uncertainty surrounding US President Donald Trump's tariff policies has raised the yellow metal's safe-haven appeal.

Gold has always been a safe haven asset. People flow to gold either when times are tough or when there is uncertainty in financial markets.

Recently, uncertainty has increased due to the threat of tariffs from the US. Trump's decision to impose fresh tariffs raised concerns of a global trade war.

Trump has imposed 10% tariffs on imports from China. In response, China has imposed 15% tariffs on imports from the US.

Mexico and Canada have avoided tariffs for now but these nations along with many others are in the crosshairs of the Trump administration. There have been media reports that suggest Trump might consider tariffs on European countries too.

In fact, there are reports about Trump announcing reciprocal tariffs on many countries this week.

And now, a major universal tariff of 25% is planned to be imposed on aluminium and steel. This will be applicable on all countries exporting these goods to the US.

Clearly, the markets don't like uncertainty regarding trade. The second and third order effects of these tariff policies will only be known later.

This uncertainty has caused fears among traders and investors about the impact of these policies on the profits of many companies.

Thus, some investors have begun to take defensive positions in the markets. This involves selling some of their stocks or reducing the exposure to them and moving the funds to safer assets like gold.

This is because gold prices often rise in times of financial uncertainty.

Then there is inflation to consider. Trump's policies might have a negative effect on US inflation, in the short term. In that case, it could mean that the US Fed will not cut rates soon. This would be another blow to the stock market.

#2 Geopolitical Uncertainty

Trump's Middle East policy has rattled many people in financial markets.

The proposed plan to take over Gaza has sent shockwaves across the region. Many countries in the Middle East have described the plan as destabilising.

While the details of Trump's Gaza plan may be too complicated to be practical but the fact that such a plan has been proposed is enough to worry the market.

The last thing financial markets want is another war in the Middle East. Thus, any proposal that increases tensions in the region will be looked at with serious concern.

#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 45,000 and have now almost doubled their investment. 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. 2024 clearly re-enforced that view in the minds of investors.

2025 could see a repeat performance if inflation remains high. The year has certainly started with a bang for the yellow metal.

Fear of trade wars are helping to support the gold price.

And if another war were to break out this year, then gold prices would soar to new highs due to safe haven buying.

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 wealthy person's portfolio.

It makes sense to hold some precious metals 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 education purposes only. It is not a recommendation and should not be treated as such. Learn more about our recommendation services here...