Going for gold?
For decades, it was wise to heed Warren Buffet’s observation that gold has no utility and that over any 100-year period, you will be better off owning income-producing assets. Gold, he said, can only be looked at and fondled. I have previously noted that gold is merely a bet on increasing fear and anxiety, and given these are sentiments, their shifts can be rapid and impossible to predict.
More recently, gold has been on an impressive upward trajectory, tripling since the lows of 2015 and accelerating, almost vertically, in 2025, captivating investors and analysts alike. As of 4 April 2025, the precious metal continues to break records, with prices soaring to US$3,113 an ounce.
As is typical when assets, securities or commodities soar, the rally generates its own widespread interest, so it is important to remember that the themes and logic you may hear to justify a purchase of gold today, are the same themes and logic that caused other investors to buy gold at much lower prices last year and the year before. You could be too late.
But what’s driving the gold price surge? And more importantly, does it make sense to add an allocation of gold to your portfolio if you haven’t already done so? Let’s look at the reasons behind the gold price surge, the factors fuelling the rally, and whether physical gold, gold exchange traded funds (ETFs), or Australian gold producers are a sensible fit. Or is it too late?
Why is the price of gold rising?
Gold’s ascent is a response to a confluence of global economic, geopolitical, and market dynamics, including:
Geopolitical uncertainty: Wars, pandemics, and terrorist attacks are all examples of noneconomic sources of market crises. These typically produce a surge in the purchases of gold, which, all else aside, is simply a bet on the fear and anxiety of others increasing. Gold also thrives as a safe-haven asset during such times, as investors seek refuge from unpredictable markets.
Today, ongoing tensions in regions like the Middle East, Russia and between the U.S. and China, coupled with trade policy shifts under a second Trump administration, have heightened global instability.
Central Bank buying: Central banks, notably the People’s Bank of China, have been stockpiling gold at a remarkable pace. In 2024 alone, purchases exceeded 1,000 tonnes for the third consecutive year, with renewed buying in late 2024 signalling a strategic shift away from U.S. dollar reliance, possibly alluding to preparations for military conflict. This sustained demand has bolstered prices significantly.
Weakening U.S. dollar: A depreciating dollar – down roughly 10 per cent in recent years –makes gold more affordable for foreign investors, driving global demand. When the dollar weakens, fringe investors believe the U.S. dollar is going to lose its global reserve status and with no reasonable fiat alternative, gold often shines brighter as an alternative store of value.
Inflation and rate cut expectations: With inflation proving stickier than anticipated and the U.S. Federal Reserve hinting at potential rate cuts, gold’s appeal as an inflation hedge has grown. Lower interest rates also reduce the opportunity cost of holding non-yielding assets like gold, rendering it more attractive.
Investor sentiment and momentum: A crowd draws a crowd. Investors, particularly those in WEIRD countries (wealthy, educated, industrialised, rich and democratic), have jumped back into gold through ETFs as prices hit new highs. Meanwhile, Asian markets, especially China and India, have seen robust physical demand, magnifying the rally’s momentum.
Flight-to-quality flows: Economic volatility – spurred by tariff threats, debt concerns, and uneven global growth – has pushed investors toward gold as a reliable hedge. ETF inflows have accelerated in early 2025 with US$9.4 billion recorded in February alone, underscoring this trend.
While these factors paint a bullish picture, the rally isn’t without its sceptics.
Historically, gold has rarely reached a so-called new permanently high plateau. Instead, bursts of vertical price action have been followed by steep descents. For example, after peaking at US$1,910 in 2011 amid riots in England, a Eurozone debt crisis, and a downgraded U.S. credit rating, gold crashed and saw a prolonged decline starting in 2013, losing over a quarter of its value in nine months from October 2012 to July 2013. Buying at peak levels in the past has preceded a downturn.
Meanwhile, some market observers have noted that gold’s recent rally may be “overstretched”, but many of these cite charts and technical analysis, which we know to be broadly useless unless you spend billions on artificial intelligence (AI) and a team of PHDs to find repeatable patterns.
Rising interest rates and opportunity costs: Gold pays no yield, and with the Federal Reserve raising interest rates to combat inflation (recently reaching their highest in 20 years), the opportunity cost of holding gold increases. Higher bond yields draw investors away from non-yielding assets like gold, potentially triggering a sell-off. This was evident when gold corrected alongside rising yields starting in August 2020.
Shifts in investor sentiment: The hardest to predict. Many analysts have suggested in the past that gold fails as an equity hedge. Back in 2021, BlackRock warned that gold’s role as a safe haven may be overstated. If bullish investor sentiment evaporates or investors lose confidence in gold’s ability to protect against market volatility – especially as stocks have historically outperformed it over long periods (e.g., S&P 500 vs. gold returns over 30 years) – demand could drop, leading to an unpredictable crash.
Speculative excess and market manipulation: There’s speculation of a longer-term “pyramid scheme” in gold leasing by central banks, where leased gold is sold short, artificially suppressing prices for a while, and until physical demand outstrips supply. If this is correct and it unwinds, as some argue it did post-1971 when Nixon ended the gold standard, prices could spike briefly and then plummet as the market corrects from speculative highs.
Economic stabilisation: As we have noted, gold thrives in uncertainty and fear, uncertainty and doubt (FUD), but if geopolitical tensions (e.g., Middle East wars, U.S.-China trade disputes) ease or fiscal policies stabilise (e.g., the U.S. addresses its deficits), investors might shift back to riskier assets like stocks. Gold stagnates or falls in healthy economies or when rates consequently begin rising, as seen between July 2020 and August 2022 when gold prices dropped 20 per cent.
So, should you allocate to gold?
The benefits include;
Diversification: Gold’s low correlation with stocks and bonds can reduce overall portfolio risk, especially during market downturns.
Inflation hedge: As major fiat currencies lose purchasing power, gold tends to hold or increase its value, protecting your wealth.
Safe haven: In times of geopolitical or economic turmoil, gold often outperforms riskier assets.
Liquidity: Whether through ETFs or physical forms, gold is relatively easy to buy and sell globally.
But not everyone agrees and some of the criticisms include;
No income: Unlike stocks or bonds, gold doesn’t pay dividends or interest, relying solely on price appreciation for returns.
Volatility: While less volatile than some assets, gold prices can still swing significantly, as seen in past years with gains or losses near 30 per cent.
Opportunity cost: In a rising interest rate environment, income-producing assets like bonds might outshine gold.
Storage costs (physical gold): Owning physical gold involves expenses for secure storage and insurance, eating into returns. Of course, for someone buying a few ounces or even a few kilos, this is a minor cost.
Nevertheless, given these trade-offs, gold arguably works best as a complementary asset rather than a core holding. If your goal is to hedge against uncertainty or inflation, a modest allocation could be a smart move even at current prices – but your risk tolerance should be high and your investment horizon should be dynamic.
Physical gold, ETFs, or gold producers
If you’ve decided to invest, the next question is how. Three popular options are physical gold, gold ETFs, and Australian gold producers.
1. Physical gold
Buying gold bars, coins, or jewellery provides tangible ownership of the metal. There is no counterparty risk (you own it outright), it is universally accepted, and it is store of value during crises. The downside of course, is that there are storage and insurance costs, lower liquidity (finding a buyer can take time), and potential purity concerns.
Meanwhile, for non-U.S. investors, a weakening USD can boost gold’s value in local currency terms (e.g., AUD), enhancing returns. However, if the AUD strengthens significantly against the USD, your gold’s value in AUD might lag.
2. Gold ETFs
ETFs track gold prices by holding physical gold or derivatives and are tradable as quickly as stocks. The high liquidity, lack of storage hassles, low entry costs, and easy divisibility and diversification make them appealing.
The most liquid ETFs in the world are typically priced in USD, so a falling USD benefits non-USD investors (e.g., AUD holders) as gold rises in local terms. However, currency fluctuations can erode gains if the AUD surges.
3. Australian gold producers
Investing in gold producer stocks is often touted as an alternative to owning physical gold, with several claimed benefits that appeal to investors. Gold producer stocks can offer greater profit potential compared to physical gold, as their value is tied not only to gold prices but also to the company’s operational success, production increases, and operational and management efficiency, which can amplify gains during gold bull markets. Meanwhile, unlike physical gold, which generates no income, gold mining companies may pay dividends, providing investors with a steady cash flow and potential stock price appreciation.
Importantly, gold stocks often act as leveraged plays on gold prices; when gold prices rise, mining companies’ profit margins can expand significantly due to fixed production costs, potentially outpacing the price increase of the metal itself. This is especially true of the lowest-cost producers.
Stocks are typically easier and faster to buy or sell through brokerage accounts compared to physical gold, which may involve storage fees, transportation, or finding a buyer, making them more convenient for active investors seeking flexibility.
Finally, owning shares in gold producers allows investors to diversify across multiple companies, regions, and operational strategies, reducing the risk tied to a single asset like a gold bar or coin.
Of course, these advantages come with risks like company-specific issues or equity market volatility, but they make gold producer stocks a compelling option for those seeking exposure to gold’s value.
So, if safety and control matter most, physical gold could be ideal despite storage costs, especially if you’re in a currency benefiting from USD weakness.
If convenience and liquidity are key, then ETFs offer a hassle-free way to participate (in the ups and the downs), with currency gains possible for non-USD holders.
Finally, if some income and growth potential are primary, the lowest-cost gold producers could outperform if gold prices keep climbing, with AUD investors enjoying a home-currency advantage.
It doesn’t seem the Trump slump is abating, and it doesn’t seem China, or the U.S. will back down and cool their ambitions to dominate. If that assessment is correct, gold’s rally is poised to continue, driven by uncertainty and demand. A small allocation could hedge your portfolio against chaos. I doubt gold is a golden ticket to riches, but it might just be the balance your portfolio needs in these turbulent times.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
