Gold’s sheen reflects uncertainty
Investors should phase in their gold purchases to hit a portfolio weight in sync with their mid- to long-term investment objectives
WHY has a non-yielding asset class retained its pole position for two years running – up 27 per cent in 2024, gaining about 50 per cent in the year to date, and outperforming most asset classes in 2025? In September alone, gold surpassed its own record to surge past the US$4,000-an-ounce level.
As gold is typically positioned as a safe-haven asset, store of value and portfolio hedge, its recent rally reflects investors’ calibration of portfolio risks within a market environment which is fraught with geo-economic risks, market uncertainty and concerns over the debasement of fiat currencies.
According to the World Gold Council’s Q2 2025 Gold Demand Trends report, the 3 per cent rise in demand for gold this year was fuelled mainly by investment demand.
Chinese demand for gold rose 44 per cent year on year, and Indian investors continued to raise their holdings. Jewellery demand, the traditional source of gold demand, fell 14 per cent in volume terms to 2020 levels, during the Covid-19 pandemic. But trade in gold in value terms is up, hitting US$36 billion.
China’s jewellery demand fell 20 per cent, and that for India was down 17 per cent year on year.
Central bank buying has continued to gather momentum. More than 95 per cent of reserve managers polled in the World Gold Council’s Central Bank Gold Reserves Survey 2025 said they believed that global central bank gold reserves will grow in the next 12 months. This compares with 29 per cent in 2024 and 3 per cent in 2023.
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Apart from investments in physical gold, global gold exchange-traded funds (ETFs) recorded their largest inflow of US$26 billion in September, ending the quarter with assets under management at a record high of US$472 billion.
What’s driving demand from institutional and retail investors? The mnemonic G-O-L-D is instructive:
G: Geo-economic risks around the world explain the case for gold, which has traditionally retained purchasing power during financial and geopolitical crises. Examples of such periods are the Great Depression in the 1930s, the Opec oil shock in the 1970s, Black Monday in 1987, the Asian financial crisis in 1997 and the global financial crisis in 2008.
Notwithstanding the ceasefire in the Israel-Hamas war, the world is still grappling with the Russia-Ukraine war and the ongoing US-China rift over trade and tariffs. Gold has also benefited from investor concerns over the US’ long-term fiscal sustainability, which puts pressure on long-dated government bonds and the US dollar – traditionally seen as portfolio anchors.
O: The opportunity cost of holding gold versus other currencies. Emerging market countries have held gold as hedges against the greenback since 2022, due to the perceived inverse relationship between the US dollar and gold. The weakness in the US dollar in 2025, with the DXY Index down over 10 per cent, and the recent rate cut by the US Federal Reserve has added to the sheen of gold as the opportunity cost of holding the non-yielding metal falls.
In September, gold prices rose despite the Fed’s rate cut, and a recent spurt of US dollar stability against the G10 currencies may indicate a search for a safe-haven currency from fiat currencies in general. Apart from the US government shutdown, which has extended into its second week, the current political impasse in France and Japan has also raised fiscal risk, which weighs on the prospects for the euro and Japanese yen.
L: Liquid assets within portfolios. As part of strategic asset allocation, gold serves as a liquid diversifier in the public markets sleeve of well-diversified portfolios for institutional investors (such as pension funds, insurance firms and sovereign wealth funds) and wealth management investors (including family offices, high-net-worth individuals and retail investors). The unique role of such assets as an effective store of value during periods of financial stress, their accessibility via multiple liquid instruments or via currency trading (such as gold-linked derivatives), and ETFs linked to gold underlying also make for a ubiquitous portfolio instrument.
D: Diversification benefits. In Bank of Singapore’s 2024 study of regime investing, we found that gold works well at buffering portfolios in stagflationary environments (low-growth, high inflation), but is less effective in a “Goldilocks” setting (strong growth, low inflation).
Hence, gold does double duty as a diversifier against drawdowns in asset classes such as equities and fixed income (as the two are no longer inversely correlated) and against other major currencies which are vulnerable to geopolitical shifts and reserve statuses. As part of strategic asset allocation, gold serves as a liquid diversifier in the public markets sleeve of well-diversified portfolios.
Time for a gold rush?
With the rapid rise in gold prices, it is tempting to rush in for fear of missing out. But gold, like any other asset, can be vulnerable to over-exuberance when it becomes a crowded trade.
Rather, we believe gold’s true value is expressed when playing its risk management role within an adequately diversified portfolio, and not in a solo role as a speculative asset.
Based on the street’s target prices that range from US$3,800 an oz to US$4,900 an oz, the investment case for gold can be overstated in the short run, as it is predicated on further interest rate cuts by the Fed, a weaker US dollar and heightened geopolitical tensions.
All that glitters is not gold. Be aware of the differences among gold-linked instruments. For example, the performance of gold-mining stocks do not always correlate to the movement in the price of gold, and should be evaluated as equity investments to assess earnings growth and valuations.
ETFs are listed investment instruments that can be backed by physical or derivatives-based gold.
Gold as a strategic asset in diversified portfolios
Within a robust strategic asset allocation framework, an allocation to gold achieves the optimal impact of portfolio diversification, in anticipation for tail-risk events and uncertain market outcomes.
Hence, we urge investors to phase in their gold purchases in an accumulation mode to achieve the desired medium- to long-term portfolio weight based on investment objectives, as part of well-diversified investment portfolios allocated into global stocks, bonds and alternatives, where appropriate.
Risks to the outlook for gold include a resolution of the geopolitical tensions in Russia-Ukraine and Middle East. If the US economy re-accelerates amid a rise in inflationary expectations, higher real rates could also prompt the unwinding of gold positions, to the detriment of tactical investors.
For now, bouts of market volatility will persist. The recent resurgence of US-China tensions were prompted by tit-for-tat export controls for rare earth elements and President Donald Trump’s threat of 100 per cent tariffs on China, ahead of a planned meeting between Trump and Chinese President Xi Jinping in November. Amid this uncertainty, it is likely gold will retain its sheen for investors around the world for now.
The writer is global chief investment officer, Bank of Singapore
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