Looking ahead @ 2025: Gold may continue to sparkle, but focus on asset allocation, not past returns, say experts

Investing in gold in 2025: Focus on your asset allocation instead of chasing returns

It was a golden year for the yellow metal. International gold prices appreciated by close to 27 percent in 2024, adding glitter to investors’ portfolios.

A Moneycontrol analysis showed that gold's performance is next only to that of equities in India. The rise in gold prices was triggered by a gamut of factors including geo-political tensions in the Middle-east and interest rate cuts by several central banks across the world. “The significant appreciation allowed gold to outperform US equities by about 2.6 percent, hitting multiple highs culminating in a final all-time high price of $2,790 per troy ounce. Several factors contributed to this bullish trend, including heightened geopolitical tensions, interest rate cuts, election outcomes leading to anticipated macro changes, and continuing trend of diversification of reserves and investments into gold,” says Chirag Mehta, Chief Investment Officer, Quantum Mutual Fund.

This year gold lived up to its reputation of being a hedge against and inflation and a safe haven asset in times of turbulence. “The Middle East, in particular, has become a focal point for rising tensions, particularly with the ongoing conflict between Israel and Hamas and broader instability in the region. These geopolitical crises have led to a heightened demand for gold and silver, as both metals are considered safe-haven assets in times of uncertainty,” says Navneet Damani, Head, Research, Commodities and Currency, Motilal Oswal Financial Services. Collective demand for gold from central banks contributed to the increase in prices.

Also read: As equities turn volatile, gold posts its biggest gain in 45 years

“The uptrend was significantly influenced by the Federal Reserve's announcement of multiple rate cuts aimed at controlling rising inflation, which catalysed a bullish run for gold that began shortly after the first such announcement in September 2024,” adds Mehta. By the end of 2024, the US Fed had effected a total rate cut of one percentage point.

While analysts and financial advisors expect gold’s shimmer to remain intact in the New Year as well, the trajectory depends on several factors. For one, policies of US president-elect Donald Trump once he assumes office will have a role to play. “Unveiling of initial Trump policies may bring cheer to the US economy and the dollar but may not last long as the economic underpinnings will lead to execution challenges,” says Mehta.

His emphasis on ‘America First’, could involve the imposition of tariffs and other trade measures. “Such policies are likely to reshape the economic landscape, impacting both the US dollar and the gold market. The focus on domestic production and self-sufficiency could be inflationary and also enhance volatility in currency markets, further driving investors toward gold,” he adds.

Damani also expects the surge in gold prices and the demand to continue, though the first half of calendar year 2025 could see some correction, giving investors the opportunity to add gold to their portfolio.  “We maintain a positive bias and have revised our upward potential target towards Rs 81,000 on the domestic front. Over the next two Years, gold could be on track for the targets of Rs 86,000, hence “Buy on dips" is recommended. We could see Comex Gold targeting $2,830 from a medium-term perspective, while longer term targets could extend to $3,000 and higher,” Motilal Oswal Financial Services said in a research note.

According to the firm, dollar volatility will be a factor to watch out for. “The ongoing geopolitical tensions...have reinforced the dollar's appeal, creating a tug-of-war between the strength of the US currency and the demand for precious metals. As the dollar remains volatile, it adds another layer of uncertainty to the outlook for gold and silver prices,” Motilal Oswal Financial services said in a note.

Also read: Gold ETFs see nearly 4x surge in inflows amid strong investor demand and global uncertainty

Despite the overall positive outlook around gold, retail investors should focus on their asset allocation and long-term financial plan, say financial advisors. “Many make the mistake of projecting recent performance onto the future. So, if you expect gold to deliver the same kind of returns, it may not necessarily be possible. Retail investors should look at allocating 10-15 percent of their investment portfolio to gold. If there are gaps, they can increase their holdings via the systematic investment route,” says Amol Joshi, Founder, PlanRupee Investment Advisors.

Also, instead of attempting to bridge the entire gap at one go, look at investing over three to six months. “And, do bear in mind that the allocation does not include your gold jewellery, for example. That is purely for consumption purposes and should not be taken into account for computing the exposure to gold in your portfolio,” says Joshi.