In recent times, due to fluctuations in stocks, bonds, and currencies, investors have been turning to gold as a hedge asset. According to data from the World Gold Council, in the first quarter of 2025, inflows into gold ETFs reached $21 billion, marking the highest level since the outbreak of the pandemic.
The rush to buy has driven physical gold prices to historic highs. Building on the strong upward trend from last year, in mid-April of this year, gold briefly surpassed $3,500, before settling back down to $3,300. Year-to-date in 2025, gold has outperformed almost all other major asset classes, with spot gold prices at the end of April being 90% higher than they were five years ago.
For investors, the hedge function of gold is mainly reflected in its stability and liquidity. During times of market sentiment anxiety, gold tends to appreciate, making it a preferred asset for hedging against currency inflation.
Currency inflation is currently a major concern for many people. Since 2009, major countries have adopted loose monetary policies or expanded fiscal spending, leading to continuous increases in global commodity prices. Recent trade wars among major countries have also raised concerns about inflation.
In addition, fluctuations in the US dollar and US bond prices have been notable. In mid-April, the exchange rate of the US dollar against other major currencies hit a three-year low. Generally, gold prices have an inverse relationship with the US dollar; a depreciation of the US dollar tends to drive gold prices higher.
Apart from market trends, cultural practices in countries like India and China also contribute to the demand for holding gold. These two countries are the largest gold markets globally, where jewelry, gold bars, and gold coins are passed down through generations, symbolizing prosperity and security. Indian households possess around 25,000 metric tons of gold, more than five times the gold reserves in the US’s Fort Knox vault.
People in China and India are very sensitive to gold prices. When financial market investors shift their focus away from gold, physical buyers of jewelry and gold bars often enter the market to purchase cheap gold, helping to maintain prices at elevated levels.
Central banks are also major buyers of gold. According to World Gold Council data, in 2024, central banks around the world purchased over 1,000 metric tons of gold bars for the third consecutive year, accounting for about one-fifth of the total historical mined gold.
Since the beginning of last year, gold prices have shown a consistent upward trend. However, profit-taking by investors could lead to a period of consolidation in gold prices. Factors such as significant tariff reductions or a peaceful agreement between Russia and Ukraine could stimulate a decline in gold prices.
Central banks reducing their reserves also have the potential to cause gold prices to decline. In the 1990s, continuous selling of gold by central banks resulted in a more than 25% drop in gold prices over a decade.
Concerned about the potential market disruption from large-scale selling, a first Central Bank Gold Agreement was reached in 1999, with signatory countries agreeing to limit collective actions of gold bar sales. Developed countries’ central banks have sold minimal amounts of gold in recent decades, and there are currently no central banks considering large-scale gold sell-offs.