Gold continues to glitter, but old concerns remain

A comparative analysis of investments made in gold and US equity markets since 1971 shows that returns have been far higher in US’ stock market.

Gold is shining brighter than ever before. It crossed the psychological barrier of Rs 1 lakh for 10 grams on April 22. There has been a dip since then, but the golden asset continues to lure investors. It shot up to $3,500 per ounce in global markets earlier but is now ruling at about $3,300. Predictions by investment banks like Citi and J P Morgan range from $3,000-4,000 by the end of 2025.

The reasons for the recent spiral are not hard to find. Gold is considered a ‘safe haven’ asset in times of uncertainty and turmoil. Prices, thus, spurted during the COVID-19 pandemic. This was followed by rising geopolitical tensions with Russia’s invasion of Ukraine and then the eruption of the Israel-Gaza conflict. The resulting disruption of global supply chains enhanced the lustre of gold. Finally, United States President Donald Trump brought unexpected protectionist tariffs that threatened to launch global trade wars.

The spur for the latest price hike was Trump’s threat of toppling Federal Reserve chief Jerome Powell along with the prospects of recession in the world’s biggest economy. The weakening of the dollar was another factor as the yellow metal is denominated in this currency. A declining dollar makes gold cheaper for non-US buyers, thus pushing up demand and prices.

The crisis has now eased with Trump softening his stance while hints are being given of a possible US-China trade deal. Stock markets have stabilised, while gold rates are also pulling back slightly. Yet, prices remain elevated, having risen by over 30% since January.

As the world marvels over the continuing sheen of gold, this ancient commodity continues to have a vice-like grip over consumers’ imaginations. Though viewed as an asset like equity and real estate, India and China venerate it as a traditional gift in the form of jewellery at weddings and festivals. According to the World Gold Council, jewellery is the largest source of annual demand, accounting for 50% of total consumption.

Unlike other assets, it is tangible and permanent in contrast to paper assets like stocks and bonds. In addition, it is highly liquid and retains its value during unpredictable times. Central banks also keep gold in reserve to protect national wealth from economic crises. They hold about one-fifth of all gold ever mined, according to some estimates. In recent times, emerging economies like India and China have been buying more gold in a bid to diversify reserves away from the dollar.

India’s gold reserves have risen from 754 tonnes in 2021 to 876 tonnes in 2024. These now account for 11.35% of the country’s total foreign exchange reserves. India currently holds the ninth-largest gold reserves in the world.

For retail investors, however, gold has not always been considered the ideal option. It may be glittering at high rates right now and has won many hearts, especially in India, but it is not a productive investment. Unlike equities, bonds, or real estate, gold does not provide any dividends, interest, or rent. The profit is only when sold outright.

As for long-term returns compared to other assets like equities, some studies show it is much lower. Since international gold prices were delinked from the dollar only in 1971, a comparative analysis of investments made in gold and US equity markets since then showed that returns have been far higher in US’ stock market.

There are varying views on the issue, depending on the period covered for a comparative study. Yet it has the advantage of easy liquidity in times of crisis. Investment experts, thus, generally advise that gold should form about 15-20% of an individual’s financial portfolio.

Nowadays, it is possible to make investments without having to hold physical gold. Options like gold exchange-traded funds (ETFs), and digital gold are available. These are all linked to the market price of gold and provide the same benefits as the physical commodity without the hassle of storing the metal.

As for India’s jewellery industry, the recent uptick in rates is worrying as consumer budgets have not expanded by the same amount. Customers will still be lured, however, by exchanging old jewellery for new while special discounts are already being advertised.

Gold prices may have skyrocketed, but the appetite for the precious metal is not likely to diminish soon. The concept of gold as an auspicious and traditional security for all classes of society in India is too deeply ingrained to be eliminated in a hurry.

Sushma Ramachandran is a senior journalist.

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.