In the past couple of years, one investment asset has captured the attention of many—gold. The price of gold has seen a meteoric rise since 2023, reflecting a complex interplay of global economic factors and investor sentiments. As of February 19, 2025, the London spot price of gold crossed $2936.85 per ounce, marking a significant increase of 12.4% from the beginning of the year, and an astonishing 62.05% rise compared to early 2023 where the price was $1812.35.
According to a senior analyst at Morningstar (China) Fund Research Center, the consistent surge in international gold prices is driven by multiple factors including uncertainty in global economic recovery, sustained inflationary pressures, and escalating geopolitical risks. Furthermore, the global implementation of monetary easing policies has heightened inflation expectations, making gold an attractive hedge against inflation. In addition, ongoing regional conflicts and the resultant geopolitical tensions have significantly bolstered gold’s appeal as a safe-haven asset.
Despite this impressive growth, there have been signs of slight declines in gold prices recently, which has raised eyebrows in the market. Analysts suggest that when gold prices surge towards the historical high range of $2900 to $3000 per ounce, investors need to be wary of a potential retracement in gold's value.
This leads us to question whether gold prices can maintain their upward trajectory into 2025. Beyond buying physical gold bars, what financial instruments allow for gold asset allocation, and what are the corresponding risks involved?
Trust in the Dollar System Shattered
Gold has long been revered for its unique qualities that encapsulate monetary, financial, and commodity attributes, making it a favored choice for investors and consumers alike. The periods from 2024 to 2025 have witnessed a crescendo of geopolitical conflicts, enhancing gold's safe-haven status. The persistent purchasing of gold by global central banks as they seek to diversify their reserve assets has further propelled the rally in gold prices. Data from Wind shows that international gold prices rose by 13.16% in 2023 and a striking 27.23% in 2024, with the latter marking the biggest annual increase since 2011.
The momentum continued into the opening of 2025. Liang Pusen, the fund manager of the quantitative investment department at Qianhai Kaiyuan Fund, points out that the high U.S. federal funds rate of 4.25% - 4.5% still has considerable downward potential before reaching the long-term neutral rate of 3%. This potential interest rate reduction lowers the opportunity cost of holding gold, thereby boosting its price. Additionally, the U.S. economic policies to reduce taxes domestically while imposing them abroad, along with stringent immigration policies, are likely to exacerbate inflation pressures, creating added uncertainty in the market. Such an environment indeed amplifies the appeal of gold as a protective measure.
However, market insiders from GTJA Fund have noted that although policies might disrupt the market, the prevailing strength of the dollar index could temporarily amplify gold price fluctuations. As the Federal Reserve initiates a rate cut cycle, it considerably lends support to gold prices, and China's recent three-month consecutive increase in gold holdings also helps uplift market sentiment towards bullishness.
A recent post from CICC Wealth emphasizes that the fundamental logic behind gold’s fast ascent is largely due to a declining trust in the dollar system. As the imbalance of U.S. debt looms, skepticism toward the dollar's credibility is growing. Consequently, gold, as a global hard currency, has become a new standard for wealth retention.
Since 2022, central banks across the globe have been continuously acquiring gold to facilitate de-dollarization and reconstruct the valuation benchmarks of wealth globally. The World Gold Council reports that central banks globally have acquired more than 1000 tons of gold for three consecutive years through 2024, setting a historical precedent.
Nevertheless, fluctuations in gold prices have also produced noticeable ripples in the market. On February 14, international gold prices experienced declines. COMEX gold futures fell by 1.76%, settling at $2893.70 per ounce, while London spot gold dropped by 1.54% to $2882.085 per ounce.
This downturn has attracted considerable market attention. Liang Pusen explained that since the onset of interest rate reductions, the Federal Reserve has not committed to a fixed rate pathway, instead emphasizing “data dependence.” The consumer price index (CPI) and producer price index (PPI) for January both surpassed market expectations, reinforcing the Fed's stance to maintain elevated interest rates. Moreover, during a Senate hearing, Fed Chair Jerome Powell indicated that there is no urgency to cut rates, thereby contributing to certain downward pressure on gold prices along with substantial profit-taking pressure given the recent highs.
Amid soaring gold prices, many investors are keen to capitalize on the upward trend.
CICC Wealth has reported that in addition to purchasing physical or paper gold, an increasingly popular avenue is to invest in exchange-traded funds (ETFs) related to gold. This method not only lowers investment barriers but also affords greater liquidity, tracking gold prices effectively. Over the past two years, many gold ETFs have achieved an impressive average increase of over 60%. However, it’s pivotal to note that gold has not consistently appreciated within a prolonged cycle. Profitability in gold investments is heavily contingent on the timing of entry and duration of holding the asset.
Experts from Tianxiang Investment Evaluation Center delineate three main categories of gold investment funds. The first category comprises commodity gold funds, primarily invested in physical gold contracts and predominantly structured as ETFs, characterized by high liquidity and low fee rates. This category mainly tracks domestic gold price fluctuations like that of the Shanghai Gold Exchange.
The second category involves gold QDII, which directs investments towards overseas gold assets linked to international gold prices, exposing investors to heightened volatility and additional currency exchange risks.
The third category consists of thematic gold equity funds that focus on equities related to the gold sector, which are inherently impacted by both gold prices and corporate performance and are more susceptible to market fluctuations.
As of February 19, 2025, data from Wind shows that capital directed to gold ETFs has exceeded 8.8 billion yuan with returns spanning from 9% to 11%. The performance of thematic gold QDIIs ranges from 10% to 15%. However, due to the lack of strict classifications among gold thematic equity funds, specific performance metrics are harder to trace, although notable reductions in gold equity holdings were evident in some public funds during the fourth quarter of 2024.
Looking forward to 2025, analysts predict that if the prevailing policy uncertainties persist, gold prices could skyrocket to as much as $3300 per ounce by year-end. Goldman Sachs reiterates its "long gold" recommendation while asserting that despite potential transient declines due to reduced uncertainty, maintaining gold holdings serves as a robust countermeasure against market uncertainties.
As gold prices surge, investors are left pondering their investment strategies and associated risks. GTJA Fund highlights that on a long-term horizon, factors like rampant monetary expansion and the monetization of fiscal deficits pose challenges to the dollar’s trustworthiness. Concurrently, the geopolitical instability underscores the demand for diversified asset reserves, keeping gold in high demand as a secure asset.
In an insightful commentary, financial researcher Bi Mengyan notes that gold embodies three core attributes: financial, commodity, and hedging, with current risks commensurate with these features. The first being interest rate risk, where rising rates elevate the opportunity cost of holding gold due to its non-interest bearing nature. Subsequently, geopolitical risks can prompt swift movements in prices should tensions ease. Lastly, while inflation does influence gold prices, its impact has waned post-2005, with financial and hedging aspects now dominating price behavior.
Liang Pusen also conveyed that unrestrained surges in gold prices may not be favorable as they inflate current gold values while simultaneously reducing anticipated real return rates on investments. For long to mid-term asset managers, rapid price increments may pose considerable risk, highlighting the critical necessity of keeping an eye on global central bank gold acquisition trends as an essential driver behind enduring gold price resilience.
Currently, tensions underpinning gold prices indicate a pressure towards mean regression, with the potential for substantial short-term fluctuations. Therefore, investment logic surrounding gold should prioritize its long-term allocation advantages driven by its low correlation with equities and bonds while emphasizing strategic positioning rather than chasing immediate profits.