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The golden trade: will gold continue to shine?

Date: 05 November 2025

3 minute read

Gold is known to be so malleable that one ounce of the precious metal can be stretched into wire 50 miles long. This year, the gold price has become similarly stretched as the price per ounce rose from US$2,625 on 1 January to a peak of US$4,346 on 20 October. However, in recent days the price of gold has fallen back and at the time of writing stands at $4,001 (3 November). 

So, what drove the spectacular returns so far this year and is the recent volatility a sign that it is coming to a brutal end?

Geopolitical shifts drive demand

Typically, gold is seen as a hedge against market volatility and inflation, but these are not the only reasons why gold has been doing so well.

An early catalyst for its increased popularity happened in February 2022 just after the start of the Russia-Ukraine war. Following Russia’s invasion, the EU moved to freeze Russian central bank assets held in its jurisdictions – an amount estimated to be around US$300bn.

China responded to this by reducing its holdings of US Treasuries, assets which are often held within the US financial system, and buying gold, to be stored domestically. Since November, China has purchased 354 tonnes of gold, increasing its reserves by 18%.

Nervousness around asset freezes is not the only attraction of gold for central banks. Moves by the US to cut trade surpluses (the difference between what other countries sell to the US and what they buy from it) resulted in the ‘Liberation Day’ tariffs. Ultimately, the expectation is that the US will import less in the way of foreign goods. This means countries that have historically sold a lot to the US will hold fewer dollars, money which often found its way into Treasuries. These countries have had to find a different safe haven in times of global economic uncertainty, namely gold.

The de-dollarisation of central banks

The de-dollarisation of central bank holdings in China, Japan, and India in particular has been matched by increased demand for gold, with other countries following suit. Emerging markets have been trying to play catch up and have increased their reserves held in gold from 7% in 2000 to an average of 20% in October 2025, while developed markets have been on a similar buying spree, holding around 40% of their central bank reserves in gold, up from around 18% in 2000.

Finally, another driver of demand is investor concern around inflation. Morgan Stanley’s CIO recently proposed that investors should follow a 60:20:20 strategy - 60% equities, 20% fixed income, and 20% gold - noting the role of gold as a key hedge against inflation, something which can be painful for fixed income holdings.

What explains the recent pull back?

While tailwinds have been blowing strongly for gold this year, a rally of this magnitude is always likely to suffer from volatile swings.

An acceleration of the speed and scale seen in 2025, in the absence of any meaningful shift in the supply and demand picture, often proves unsustainable. Also, whilst there are many reasons to support a growing gold price, it must too be said that it produces no income stream, unlike an equity or a bond, and so cannot be easily valued, further increasing its vulnerability to periods of volatility.

Given the rally so far, investors should remember to be disciplined and diversified. The case for gold remains strong, but equally, such a run cannot be sustained at the levels we have seen. Even while the longer-term outlook remains supportive, taking profits in the short term, remains a prudent strategy in a time of political and economic uncertainty.

 

Lindsay James

Investment Strategist

Lindsay is an investment strategist at Quilter Investors. She joined Quilter Investors in 2019 having spent the majority of her career as an equity analyst for a large blue-chip fund manager and subsequently at a hedge fund. She has over 14 years of industry experience.

Lindsay is a CFA charterholder and has passed the chartered wealth manager qualification. Lindsay has a degree in Economics from University College London.