Gold outran equities in the last one year, but the rally may be over for now

Business Standard

14-05-2025

Global gold prices have rallied an impressive 36 per cent over the past year, outperforming most major global equity indices and hovering near five-year highs. This surge has delivered nearly three times the returns of major US indices, with the S&P 500 returning 12 per cent and the NASDAQ 13.5 per cent in the last one year.
Over a five-year horizon, gold prices in international markets have risen by 87 per cent. However, despite this strong performance, gold has still underperformed US equities in the long run. During the same five-year period, the S&P 500 and NASDAQ rose by 105 per cent and 110 per cent, respectively.
Looking ahead, the short-term outlook for gold appears less optimistic. Gold prices are likely to stagnate or even decline by 5 per cent to 10 per cent over the next year, as it potentially underperforms global equities. Investment flows may also shift accordingly, with global funds likely reallocating a portion of their holdings in Gold ETFs to US equities.
The performance of US equities is expected to benefit from favorable trade agreements. Regardless of the final terms, any trade deals the US signs are anticipated to support its economy. Even if the US makes significant compromises, it is unlikely to revert to pre-Trump-era import duty levels. Given the unsustainable trade deficit of over $1 trillion annually, future trade deals are expected to have a net positive effect on the US economy, thus favoring equities over commodities like gold.
The progress seen on US-China trade talks - at least for now - is another positive development for global markets. A de-escalation in trade tensions between the world's two largest economies could reduce the risk of deflation globally, prompting investors to favor equities over traditional safe-haven assets such as gold.
Furthermore, aggressive interest rate cuts by the US Federal Reserve (US Fed) now seem unlikely. A resolution to the trade conflict would reduce deflationary pressures in both the US and China. In fact, higher import duties could push inflation upward, making consumer goods more expensive and discouraging further rate cuts. Persistently high interest rates in the US are a bearish signal for gold, which tends to perform better in low-interest environments.
Geopolitical tensions ease
Geopolitical tensions, another key driver of gold prices, also appear to be easing. With signs of stability on the India-Pakistan border and ongoing peace discussions between Russia and Ukraine, the global risk premium may decline—further dampening demand for gold.
Central banks in the US and Eurozone already hold substantial portions of their foreign exchange reserves in gold—75 per cent and 56 per cent respectively. With no strong incentive for further aggressive accumulation, central bank demand for gold is unlikely to increase significantly.
Additionally, the sharp rise in gold prices—up over 87 per cent in five years—could spur increased mining activity and recycling. Investors who purchased gold five years ago may now be tempted to liquidate some holdings and reallocate funds to other asset classes, potentially weighing on prices. Such a steep five-year rally is rare, suggesting the recent surge may be nearing its end in the short term.
Long-term prospects remain positive
Despite the expected short-term weakness, gold's long-term outlook remains stable. Over the next 12 to 18 months, prices may stagnate or decline modestly. However, beyond that, gold could regain its appeal, particularly as global economic dynamics evolve.
The US is also applying pressure on efforts to develop alternative global currencies. BRICS nations, for example, may scale back their ambitions to create a common currency due to fears of retaliatory tariffs from the US As a result, these countries might continue allocating a higher proportion of their forex reserves to gold, rather than parking funds in rival currencies or even in those of other developed nations.
In summary, while gold has delivered stellar returns recently, its momentum may slow in the near term due to macroeconomic shifts, policy developments, and easing geopolitical tensions. Nevertheless, its role as a long-term store of value remains intact.