Gold was the best-performing asset class in 2024 and has continued its strong run in 2025. It recently surpassed the S&P 500’s performance since the start of the millennium. Given such a performance, it would be worthwhile to examine the bull and bear cases for gold.
The bull case is as follows. First, global geopolitical tensions continue to drive demand for gold as a safe-haven asset for investors seeking to hedge risk in their portfolios. Gold tends to have a low to negative correlation with equities and a low but still positive correlation with fixed income. While not a model diversifier, there is sufficient empirical evidence to support a strategic allocation to gold as part of a broadly diversified portfolio to dampen down overall risk and volatility.
Second, central banks globally continue to be sizeable buyers of gold. Over the past few years, there has been a noticeable uptick in gold buying by central banks as they seek to add more of the metal to the asset and reserve holdings on their balance sheets. In 2010, after the global financial crisis, central banks turned net buyers of gold and bought, on average, 473t a year until recently. In 2022, 2023, and 2024, global central banks bought more than 1,000t each year, despite rising prices.
Third, a weak dollar makes gold cheaper in all other currencies in local terms, all else being equal. The dollar index is off to its worst start to the year in four decades, losing strength against a host of other currencies, amid a burgeoning US national debt and US President Donald Trump’s fiscal policy, which seeks to entrench US budget deficits for the foreseeable future. Thus, the dollar looks to be in for a period of sustained weakness.
Fourth, if you are bullish on emerging markets, specifically Asian emerging markets, you should be bullish on gold. Gold plays a role as a store of value and as a financial asset, but it is also a highly significant cultural symbol across many Asian countries and on the subcontinent. As these emerging market consumers become wealthier thanks to the region’s strong economic growth, this is expected to lead to an escalation in demand for gold.
Finally, gold has performed well in the recent past, and there is nothing to suggest it won’t continue to do so as buyers seek to buy the dips or new buyers jump in who have missed the rally. Price momentum begets more price momentum. Indeed, inflows into gold funds and ETFs have reached $80bn so far in 2025 — a record level — despite rising prices.
Investors can make bull and bear cases for everything, but eventually, you have to arrive at a final decision
What can be the bear case, given that the bull case seems pretty compelling? Central banks ease their buying spree after 15 years of net buying. Central bank gold reserves, as part of their total asset and reserve allocation, are close to 60-year highs and approaching previously observed strategic allocation levels. Could they have reached their strategic gold allocation targets? Reduced demand from such a large group of gold buyers in the overall market would be a significant headwind for gold prices to march higher from here.
A calming of geopolitical tensions may seem far-fetched. Still, Russia’s invasion of Ukraine just over three years ago seemed similarly far-fetched at the time. A lot can change in the geopolitical arena in a short time.
The dollar remains the world’s reserve currency for now, though its status and historical strength are under pressure. A sudden shift in direction back to dollar strength would be negative for gold, as it makes it more expensive in other currencies, assuming all else remains equal.
Given the current state of US budget deficits and national debt, it has led to rising long-term US debt yields, despite the US Federal Reserve cutting short-term rates. Sustained higher, especially long-term, bond yields in dollar terms make the holding costs for gold higher since gold doesn’t deliver any income stream, reducing its appeal when higher long-term rates offer a potentially attractive alternative.
The current momentum in gold could peter out and reverse. All investors, regardless of the asset class they choose to invest in, know that nothing goes up in a straight line and that every asset class moves in some form of cycle over time.
Finally, a strong stock market would diminish the appeal of gold for safe-haven investors, as they reallocate away from gold into riskier assets, such as equities.
Investors can make bull and bear cases for everything, but eventually, you have to arrive at a final decision. The decision on where to put your capital is yours.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.