Gold’s sheen reflects uncertainty

Why has a non-yielding asset class retained its pole position for two years running – up 27% in 2024 and gaining ~50% year-to-date (YTD), outperforming most asset classes in 2025? In September alone, gold has surpassed its own record to surge past the USD4,000/oz 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 debasement of fiat currencies.

According to the World Gold Council’s 2Q25 Gold Demand Trends report, the 3% rise in gold demand in 2Q25 was fuelled mainly by investment demand from gold. Chinese gold demand rose 44% year-on-year (YoY), while Indian investors continued to raise holdings. Jewellery demand, the traditional source of gold demand, declined by 14% in volume terms to levels last seen in 2020 during the Covid-19 pandemic – though value was up to USD36 billion. China’s jewellery demand fell 20% and Indian demand fell 17% YoY.

Central bank buying continued to gather momentum, with over 95% of reserve managers polled in the World Gold Council’s Central Bank Gold Reserves Survey 2025 believe that global central bank gold reserves will increase over the next 12 months. This compares with 29% in 2024 and 3% in 2023.

In response to the survey question: “How do you expect global central bank gold reserves to change over the next 12 months?”

Note - Totals may not sum to 100% due to rounding.

2025 base: all central banks (73); advanced economy (15); EMDE (58).

2024 base: all central banks (69); advanced economy (24); EMDE (45).

“Don’t know” was removed as an option from the 2023 survey onwards.

Sources: YouGov, World Gold Council

Apart from investments in physical gold, global gold ETFs recorded their largest inflow of USD26 billion in September, to end the quarter with assets under management at a record high of USD472 billion.  

What’s driving G-O-L-D demand from institutional and retail investors?

G – Geo-economic risks around the world explain the case for gold, which has traditionally retained purchasing power during bouts of financial and geopolitical crises including the Great Depression in 1930s, OPEC oil shock in 1970s, Black Monday in 1987, 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 ongoing US-China rifts over trade and tariffs. Gold has also benefitted from investor concerns over long-term US fiscal sustainability that puts pressure on long-dated government bonds and the USD – traditionally seen as portfolio anchors.

O – Opportunity cost of holding gold vs other currencies. Emerging market countries have held gold as hedges against the USD since 2022, due to the perceived inverse relationship between USD and gold. Weakness in the USD in 2025, with the DXY Index down over 10%, and the recent rate cut by the US Federal Reserve (Fed) had 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 USD 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 also raises fiscal risk, which weighs on the prospects for the EUR and JPY respectively.

L- Liquid asset 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). Its unique role as an effective store of value during periods of financial stress, 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 plays 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’s tempting to rush in for fear of missing out. But gold, like any other asset, can be vulnerable to over-exuberance as 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 USD3,800/oz to USD4,900/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 USD and heightened geopolitical tensions.

All that glitters is not gold. Be aware of the differences in gold-linked instruments. For example, performance of gold mining stocks may not always correlate to gold price moves and should be evaluated as equity investments to assess earnings growth and valuations. ETFs are listed investment instruments that can be backed by physical gold or derivatives-based.

Gold as a strategic asset within diversified investment 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 gold outlook include a resolution of the geopolitical tensions in Russia-Ukraine and Middle East. If the US economy re-accelerates amid inflationary expectations rise, 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, prompted by tit-for-tat of export controls for rare earth elements and President Trump’s threat of 100% tariffs on China, ahead of a planned meeting between US President Trump and Chinese President Xi in November. Amid this uncertainty, it is likely gold will retain its sheen for investors around the world for now.

This article was first published in The Business Times.

This article was first published by Bank of Singapore on 16 October 2025. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of OCBC Private Bank or its affiliates.

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