IT HAS been a banner year for gold bugs. Despite a 5 per cent correction on Oct 21, the yellow metal has been the best-performing asset class of 2025 so far. On Oct 20, its price crossed US$4,300 an ounce, an increase of around 60 per cent since the start of the year, outpacing all of the “Magnificent Seven” stocks that have driven the 15 per cent rally in the S&P 500. It has thrashed bonds, beaten Bitcoin, and even the world’s best-performing stock markets.
Gold’s current bull market, which dates back to 2022, has defied the usual cyclical headwinds that hold back its price. It’s famous for being an inflation hedge, typically rising when inflation goes up and then falling when inflation subsides.
For instance, its price jumped during the 1970s, when US inflation hit double digits following the oil shock of 1973-74, ending the decade at around US$850 per ounce, a more than fivefold increase compared with in 1974.
But during the 1980s, when the US Federal Reserve under the chairmanship of Paul Volcker raised interest rates to more than 20 per cent and crushed inflation, the price of gold went down sharply, all the way through the 1990s, to around US$250 per ounce in 1999.
But this pattern has not repeated itself in recent years. In fact, none of the usual headwinds has managed to slow gold’s remarkable ascent.
Old patterns aren’t playing out
After peaking at just over 9 per cent in June 2022, US inflation has steadily trended down to less than 3 per cent in August 2025. But instead of going down in tandem during 2022-25 as one might expect, the price of gold has soared.
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The gold price has also historically moved inversely with real interest rates. When rates go up, gold tends to go down, which makes intuitive sense – higher real interest rates offer higher yields, whereas gold yields nothing.
But look at what happened during the most recent rate hikes. From March 2022 to July 2023, the Fed raised its benchmark Fed funds rate by five percentage points, from 0.25 per cent to 0.5 per cent, to 5.25 per cent to 5.5 per cent, the most aggressive hiking cycle since the 1970s.
Still, the price of gold continued to rise. Nor did the gold price move inversely with the value of the US dollar, as has historically been the case.
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From March to September 2022, as the Fed was hiking rates, the US dollar index strengthened about 16 per cent to a multi-decade high, but gold rose as well.
So, there are clearly other forces that have been driving the gold price in recent years, including strategic shifts.
Tailwinds from central bank and investor demand
One of the most significant has been central bank purchases. Since 2022, central banks have bought more than 1,000 tonnes of gold a year, the highest levels since 1967, contributing 23 per cent of annual gold demand, compared with 11 per cent in the 2010s.
The biggest buyers included the central banks of China, Russia, India, Japan, Turkey and Poland. The Monetary Authority of Singapore, too, has been a net buyer of gold since 2021.
At the end of 2024, gold holdings comprised about 20 per cent of central bank reserves globally, surpassing their holdings of euros, which stood at around 16 per cent.
Unlike investors, their purchases are strategic rather than tactical; they tend to buy and hold rather than trade, which means that once they buy, gold supply gets reduced for long periods, putting upward pressure on the gold price.
One of their key motives for adding to gold reserves has, in many cases, been to diversify away from the US dollar, especially after Western sanctions on Russia’s foreign exchange reserves in 2022.
There are also concerns about record debt levels and high issuance of sovereign bonds in rich countries, which makes fixed-income assets less attractive.
Geopolitical tensions, uncertainties around trade, and an erosion of trust in traditional institutions have been additional motives for gold purchases.
Investment demand for gold has also risen for much the same reasons as central bank demand, with gold exchange-traded funds (ETFs) playing a crucial role.
In 2025, global gold ETF inflows reached a calendar year-to-date record of US$64 billion (S$83 billion) through September, according to the World Gold Council, with US$26 billion being added in the third quarter alone. The inflows in 2025 represent a total reversal from the four years preceding 2025, when gold ETFs lost US$23 billion in assets.
Much of the investment demand has come from institutions, with portfolio managers increasing their gold allocations. Investment bank Morgan Stanley has recommended a 20 per cent allocation to gold – the same as for bonds – and several others are also bullish on its prospects.
This represents a big shift from previous decades, when gold was largely out of favour, other than among a few diehard goldbugs.
Retail demand has also surged, both via purchases of gold bars and coins as well as ETFs. Demand from Asia, especially from China and India, has been especially strong in 2025.
So, unlike previous gold bull markets which were driven by single forces such as inflation, interest rate changes or currency crises, the current rally has multiple catalysts that reinforce one another.
Thus, it represents not a typical commodity cycle, but a signal of a potential reshaping of the global monetary system and the investment landscape.
Why the rally might still have legs
Despite its heady performance over the last four years, gold’s rally may yet continue.
BCA Research, for instance, suggests that some of the traditional drivers of gold prices, such as lower US interest rates and a falling US dollar, may return.
With US consumer spending slowing, job growth weak and unemployment rising, the Fed has turned dovish of late, cutting its Fed funds rate in September for the first time in a year and signalling its openness to further easing.
In response, and coupled with a loose fiscal policy, the US dollar may also weaken on a trend basis, despite occasional spikes. These developments will be new tailwinds for gold, while the existing forces driving it higher – such as central bank purchases, geopolitical tensions and investment demand – may remain.
And so it is, that some forecasts, for example, from Bank of America, Societe Generale and Goldman Sachs, see the possibility of gold prices climbing to US$5,000 per ounce in 2026.
But forecasts, too, have risks. Some of the catalysts of gold’s surge could turn.
For instance, geopolitical tensions could ease if the Russia-Ukraine war winds down and the US and China reach a settlement on trade. Investment demand, as a result, may fall off or even reverse if it is driven by excessive speculation and high leverage – which may well be the case.
If high tariffs start showing up in higher inflation by 2026, the Fed could turn less dovish than markets expect. None of this can be ruled out. The sharp correction in the gold price on Oct 21 is a reminder that there will be pullbacks from time to time.
But for now, gold is having its moment in the sun. THE STRAITS TIMES
Vikram Khanna is a former associate editor of The Straits Times who writes on economic affairs.
