Why the Gold Price Crossed 100,000

Gold has been the standout performing asset in global financial markets this year. In fact, it has been one of the main talking points around the world for quite some time.

The yellow metal's stunning rise to new all-time highs above US$ 3,500 per ounce in the global market and Rs 100,000 per 10 gm in India, has made it the topic of everyday conversation.

In 2024, gold delivered 20% compared to the Nifty's 8.7% gain. And 2025 has seen the upward momentum continue.

From about Rs 78,000 to Rs 100,000, the price of gold has risen close to 30% in less than four months so far this year.

In fact, since late July 2024, the gold price has moved up from around 70,000 levels. That's a rise of about 43% in about nine months.

If we go back a little further, the price has been moving up sharply since February 2024 from around 64,000 levels. That's a gain of about 56% in just 14 months.

These are stunning gains for gold in a relatively short period of time.

For long term investors, the gains have been just as impressive. Over the last 5 years the gold price has more than doubled, delivering a compounded annual growth rate (CAGR) of 16%.

Even stock market investors will be happy with these returns.

So, what explains the sharp run up? And will gold continue to rise or will it finally take a breather?

To figure out the answer, we must understand the factors that influence the price of gold.

#1 Loss of Trust in the US

To put it bluntly, US President Donald Trump's tariffs has raised the yellow metal's safe-haven appeal.

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

However, no matter the level of uncertainty, investors never lost faith in the US-dominated global financial system.

But things have changed now.

Trump has followed through on his election promise to impose reciprocal tariffs. This decision has raised concerns of a global trade war.

Sure, the tariffs have been paused to allow for negotiations, but the US tariffs are not only very high but are also broad-based. In the case of some countries, the tariffs were so high that it could potentially destroy trade relations.

This has shaken confidence among international investors. The US was seen as a source of stability in volatile global markets. But now it's seen as the source of the volatility itself.

The market had assumed that Trump was using tariffs as a negotiating tool and was not interested in causing serious economic pain. Thus, the thinking was that the tariff issue was more political than economic in nature.

But Trump refused to back down initially, even in the face of a likely US recession.

This spooked the stock market of course but the US government seemed willing to ignore the stock market, at least in the short term.

This resulted in a loss of trust in the US government.

Wall Street never imagined that Trump, a businessman, would hurt the US economy.

What was the result?

Money started to flow out of the US. This is clearly seen in the recent decline in the US dollar.

This is why 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, due to its safe have appeal.

#2 The Risk of Inflation

Gold has always been an effective hedge against inflation throughout history.

This is what we are seeing now. If US inflation were to rise in 2025, gold will rise in tandem.

This risk has increased along with the possibility of trade wars. Trump's tariff policies are certain to have the negative effect of increasing the rate of inflation in the US, at least in the short term.

Financial markets are extremely sensitive to any inflation related news. The risk of inflation going up again is supporting the gold price.

#3 US Recession Fears

The trade war triggered by the US has spooked global markets because the Trump administration seems determined to see it through.

There was an implicit assumption in the markets that if the tariff policies caused an economic slowdown in the US, then Trump would ease up on the tariff pressure.

Things are not so clear now. The final result will depend on the outcome of the trade talks.

This is why fears of a recession in the US has increased recently. Gold typically does well when there is fear of a recession in financial markets.

And that is playing out right now.

Could the Gold Price Continue to Rise in 2025?

The short answer is yes, it's possible.

Sentiment in the market is extremely bullish on gold right now. The market momentum is very strong.

Some investors have even considering selling stocks and just buying and holding gold.

However, investors should carefully watch out for any potential changes to the underlying factors driving up gold.

Could the Gold Price Fall?

The short answer is yes, it can.

When the entire market is talking about a rising price of gold, it's easy to forget that the opposite can also happen. In that case, it would trigger losses for leveraged traders who are long on gold.

The factors that can cause a fall in the gold price are the same as the ones that are responsible for its rise...only in reverse.

Here's how...

• Trump lowers or cancels retaliatory tariffs on most countries after negotiations.
• Inflation in the US falls faster than expected.
• Peace returns to the Middle East and Ukraine, even if it's temporary.
• There are no other major geopolitical flareups in the world, Taiwan for example.
• Recession fears in the US fade away.

Now, this doesn't mean that all the points above need to be fulfilled for gold price to fall. Even some of these may be enough to take the wind out of the sails of the bulls.

Conclusion

At Equitymaster, we believe in having 5-10% of one's portfolio in gold at all times.

However, investors should not see gold as a potential substitute for any other asset.

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.

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.

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...