Is gold still a good investment at this price? Investors should assess every factor behind its rise

The sharp rise of gold and its moderate correction since has every investor asking what is going on. What next for this metal? Should one have had gold as a chunky part of one’s investment portfolio? Have we missed the bus? These questions are from investors everywhere, but particularly in India where we think we have an edge of familiarity since we grew up with gold in our households.

New York University professor Aswath Damodaran has a nice framework to think about what investments should go into an asset-allocation portfolio. In an excellent Substack blog on the topic of gold, he says that investments may be classified into four categories.

One, assets like equities and bonds that generate cash flows. Two, commodities like copper that are useful in industrial production. Three, currencies that are a medium of exchange or a store of value. Four, collectibles like art or wine, which as the name implies, is for emotional or aesthetic value.

Gold is an interesting combination with features of a commodity, currency and collectible. However, its longstanding appeal for investors, households and central banks has been as a collectible. Gold does not have a ‘yield’ or cash flow associated with it. There is also a small cost of warehousing physical gold. Gold has retained its lustre as a collectible over centuries because it is durable, its supply is finite and it has provided a safe haven during geopolitical shifts.

Analysts cite a few drivers for the price of gold. Most of these drivers do not hold up under close scrutiny. For instance, an often-quoted idea is that gold is driven by inflation. The correlation of gold prices (in dollars) with US inflation has been quite moderate in the last 40 years. Look closer and you will see that gold does respond to large and unexpected bouts of inflation, but it is not correlated at other times with inflation movement.

Similarly, gold is not much driven by indices of volatility or crises like credit spreads. During the past year’s rally, gold prices were driven by two factors. One, continued buying by central banks to the tune of 2,000 tonnes over the last two years; and two, as a hedge against geopolitical uncertainty emerging from US President Donald Trump’s economic policies and wars in multiple locations.

Is gold overvalued? For an investment that is either a currency or a collectible, any notion of absolute value is moot. The best one can do is make some relative valuation observations. On historical trends, it does appear that the price of gold relative to that of silver is high, with a price ratio of 65 times versus an average of about 57.

Gold, relative to dollar inflation, is at about 18 times against a median value of three times. The correlation between gold and Bitcoin (sometimes called ‘digital gold’) over the past 10 years has been zero. Most major investment banks say they expect gold to resume its rise in 2026, sustain it in 2027 and head towards $6,000 an ounce. Most relative value indicators, however, do not back these predictions.

It is still possible that gold defies relative value considerations and continues to rise. One reason for that could be that central banks continue to buy it. At about 20% of reserves, gold surpassed the euro recently to become the second-largest reserve asset for all central banks combined. The central banks of Italy, China, Russia, Japan and India hold 9,000 tonnes of gold among them.

The Reserve Bank of India (RBI) dramatically slowed down its gold purchases in 2025, buying only 4 tonnes versus 73 tonnes in the prior year. Its total of about 880 tonnes of reserve gold makes up about 17% of its total reserves. Over the last few years, RBI has brought home 274 tonnes of gold. The apparent aim of this is to secure these assets onshore as a hedge against geopolitical uncertainty. India’s central bank could continue to gradually increase its gold reserves and bring more of it home.

Should India, China, South Korea and Brazil decide to increase their central bank gold allocation to 30% of reserves, that would imply a significant increase in gold demand. The US manages its bullion stacks in a peculiar way. Its reserves of 8,000 tonnes (worth well over $1 trillion) are managed by the Treasury department.

The Federal Reserve, its central bank, was issued ‘gold certificates’ when these were transferred at $42 an ounce. The US Federal Reserve could conceivably ‘mark to market’ these gold certificates and return the excess to the US Treasury through a special dividend. If this were to happen in whole or part, there could be a massive spike in the price of gold (driven by front-running) and a strong inflationary impact within the US.

Gold is a collectible that has some diversification value for investor portfolios. However, adding it to one’s portfolio at a time when its relative valuation is out of alignment with historical trends seems imprudent. For long-term growth in the value of assets, it is advisable to stick to those that generate or deliver cash flows.

P.S: “The desire of gold is not for gold. It is for the means of freedom and benefit,” said Ralph Waldo Emerson

The author is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand