Decoding gold rally: Why yellow metal surged 15% in one month and should bullion be in your portfolio?

After a dramatic downturn that left gold investors scrambling for cover, the precious metal has staged a 15% jump in just one month. The sharp rebound marks its strongest rally in more than four months and has once again put the spotlight on whether gold can repeat its 2025 feat and reclaim its fresh peak of $5,500 it touched earlier this year. The metal is still about 16% below that level.

Gold has endured one of its most volatile starts to a year in recent years. The precious metal surged to record highs in January, climbing past $5,500 per ounce, before tumbling to $4,600 per ounce by August. The sharp correction came as renewed tensions over the Iran war sent oil prices soaring, fuelling expectations that the US Federal Reserve could raise interest rates later this year.

What’s instilling strength?

Robust ETF flows - Gold exchange-traded funds are seeing renewed demand. According to World Gold Council data, about 23 tonnes of gold was added to global ETF holdings. Flows have accelerated in August, with 45 tonnes added to global ETFs month-to-date.


Central bank buying - Per World Gold Council, central banks purchased 288.9 tonnes of gold in the second quarter, a 62% increase from a year earlier. South Korea has now joined that list, with its central bank returning to the gold market after 13 years, reinforcing the trend of sustained official-sector demand.

Central banks remain on course for another strong year of net purchases. The structural case for gold, built around diversification, crisis performance and protection against geopolitical and financial risk, remains well established.

The council's Central Bank Gold Reserves Survey found that 89% of respondents expect global reserves to rise over the next year, while a record 45% expect to increase their own holdings over the same period. Central bank demand is expected to remain above its long-term average.

The survey also shows that the strategic case for gold remains firmly in place. Reserve diversification, protection against geopolitical and financial-market uncertainty, and gold's role as a long-term store of value continue to feature prominently in central bank thinking. Reserve managers continue to view gold as an important component of official reserves, even though high prices and country-specific liquidity needs influence the timing and scale of individual transactions.

Hopes of the US Fed holding rates - Expectations around US interest rates are also supporting gold rally. Traders are now pricing in a 61% chance that the Fed will keep rates unchanged next month, while the probability of a hike stands at 42%, according to the CME FedWatch Tool.

Gold is typically seen as a hedge against inflation, but higher interest rates tend to reduce its appeal because the metal is a non-yielding asset.

US Treasury's bond buyback move - The US Treasury has announced that it will double the size of buybacks of longer-dated Treasury securities over the next quarter to at least $4 billion per operation. Treasury Secretary Scott Bessent has also said the government could increase the repurchases further.

The move is aimed at helping keep longer-term Treasury yields under control. That is supportive for gold because lower bond yields reduce the opportunity cost of holding the non-yielding asset. Gold can also benefit if the move puts pressure on the US dollar, as a weaker dollar makes the metal cheaper for buyers holding other currencies.

Weaker dollar - A softer US dollar and efforts by the US Treasury Department to keep longer-term yields under control have also supported gold's rally. The dollar was headed for a weekly decline, making dollar-priced commodities more affordable for holders of other currencies.

Should gold be in your portfolio?

The recent pullback may have created an opportunity for investors to gradually start accumulating gold, according to Jefferies' Global Head of Equity Strategy Christopher Wood and billionaire hedge fund manager John Paulson. Both suggest that the precious metal could be at the beginning of a long-term bull run.

"As people lose faith in paper currencies, gold as an alternative will continue to grow," Paulson said. The billionaire, whose bet against subprime mortgages became one of the most profitable trades in Wall Street history, turned his attention to gold in 2009.

He argued that fiscal and monetary stimulus following the financial crisis would eventually weaken the US dollar. Since then, gold prices have roughly quadrupled, crossing the $5,000 threshold before pulling back.

Paulson said demand for bullion is continuing to broaden, led by central banks adding to their reserves alongside rising interest from the private sector.

"Gold is becoming the most apt reserve currency in the world, replacing fiat currencies," Paulson said. "The demand from central banks, for instance, has continued to grow, as has the private sector."

Paulson, however, believes investors could benefit more from owning gold mining companies than bullion itself, particularly companies with large undeveloped reserves. "I think the greatest way to invest is to invest in early-stage gold stocks," he said.

Christopher Wood, in his Greed and Fear report, said investors should once again begin accumulating gold and gold mining stocks after an extended pause.

Wood draws a parallel with the dot-com bust. He argues that when the Nasdaq-led technology sector drove the market lower, the bear market had by late 2000 spread beyond technology to other sectors as it became clear that the unwinding of the dot-com boom would affect the broader economy.

He believes a similar scenario could unfold if the AI capex boom implodes, which he says would happen if credit issues come to the fore.

This comes despite the broadening of the US equity market since the AI capex boom and the related increase in wealth effect in the US stock market, which have been among the main drivers of US economic growth over the past three years, along with easy fiscal policy.

Gold is the second-best hedge for investors amid rising fiscal and geopolitical risks, Wood added. He said oil and energy stocks remain the preferred hedge as the economic and geopolitical pressure surrounding Iran continues to disrupt energy markets.

Wood said the latest strategy appears to be based on hopes that economic pressure will force Tehran back to the negotiating table, but said he would not bet on such an outcome. Tehran, he said, has every incentive to maintain the pressure until the US mid-term elections, which are now 11 weeks away.

Investment is expected to remain the principal source of demand growth through the rest of 2026, with increasing support from over-the-counter (OTC) activity and Asian buying. Central banks are also expected to remain significant buyers.

High gold prices are likely to continue weighing on jewellery demand, while eliciting only a measured response from mine production and recycling. Western gold ETF flows may remain sensitive to real yields, monetary policy expectations and the US dollar.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)