What can go wrong with gold

When an asset class is already outperforming, there’s usually no shortage of experts to tell you why the gains will continue. This is now happening with gold. As of October 14, 2025, gold had delivered a 61% gain for one year, a 33% return over 3 years and 18% over 5 years.  

Today, we have social media posts pointing out how gold has beaten the Nifty50 in the last 20 years and giving reasons why gold’s rise will continue. The reasons range from Fed rate cuts, to central banks diversifying from the US dollar and a possible sovereign debt crisis and tariff uncertainties. Brokerages are also putting out lofty price targets for gold which ‘predict’ that gold will head to $5000 or $6000. 

At Primeinvestor.in, we have for long recommended an allocation to gold in your portfolio, to hedge against crisis and turmoil in other assets. But we are not in favour of jumping from equities or bonds into gold today, after big gains have already been made over the last five years. 

In fact, when an asset is this much of a rage, we try to step away from the herd and figure out what can go wrong with it.  So, here are five factors to watch out for, which can halt the gold rally and trigger a correction in its prices.  

#1 Mammoth supply overhang

Unlike stocks, bonds or other industrial commodities, gold is not used up or consumed by those who buy it. Those who buy gold (in any form) just stash it in vaults or lockers. Therefore, most of the gold mined in recent history is still available as above-ground stocks with individuals, governments, central banks and institutional investors. 

World Gold Council estimates that the total above-ground stocks of gold amounted to about 216,265 tonnes in 2024. Over 97,149 tonnes is held in the form of jewellery, 48,634 tonnes in bars and coins, 37,755 tonnes with central banks, about 54,770 tonnes as reserves as so on. This above-ground stock dwarfs both global supplies from mining and demand from all sources. 

Globally, mining operations produce about 3600 tonnes of gold annually and this number has flat-lined in the last four years. Contrary to perception, the demand for gold has not seen a secular rise. Between 2015 and 2024, the global demand for gold has dipped from about 5500 tonnes to about 4500 tonnes. In this period, while investment demand for gold from central banks and ETF investors has risen strongly, demand from jewellery buyers has sharply reduced. 

Gold is therefore the only commodity where liquidation of even a small portion of the above-ground stocks can easily meet demand, and pressure prices. This risk is unique to gold and is not present in any other asset class be it stocks, bonds, silver (as it also has mainly industrial uses) or industrial commodities. 

#2 Crisis can trigger liquidation

One of the main reasons to hold gold in the portfolio is that it serves as protection against adverse events – recession, war, geopolitical tensions, fear of sovereign default, bond and stock market crashes and so on. Gold usually rises when any of these crises is feared by the markets. However, the funny thing about gold is that when crisis actually hits, it is often the first thing that its holders liquidate to raise quick money. 

In India, we know that when households run into an emergency or a debt crisis, they pledge or sell their jewellery to raise quick cash. Governments and central banks do the same thing. When governments get into an unsustainable situation on debt or balance of payments and are on the verge of default, they pledge or sell their gold stocks to raise lines of credit from IMF and other institutions. Today, fears of a sovereign debt crisis hover mainly around the US, UK, Japan and other advanced economies. The central banks of these countries are also some of the largest holders of gold reserves. 

Central banks also tend to lighten up on gold holdings when there’s no cloud on the horizon and economic growth is going strong. For a long period before 2000, central banks were steady sellers of gold. This makes sense because gold, unlike treasuries or other assets, doesn’t yield any regular return or cash flows to its investors and only relies on price gains for delivering returns. 

Given the quantum of money they have locked up as reserves, central banks prefer return-generating assets like treasuries over physical gold, except in crises. They are also cautious buyers of gold, adding stocks when prices are low and staying away when they are at historic highs.

# 3 Lower jewellery buying and recycling 

Global gold demand comes from two main categories of buyers – consumers buying jewellery and investors buying bullion as an asset. This makes for very differing reactions to any surge in gold prices. When gold prices shoot through the roof, jewellery buyers (like all consumers) postpone or cut back on their purchases, waiting for the price to cool off. Therefore, whenever gold prices move into a new orbit, global jewellery demand shrinks. Investors on the other hand, like to chase outperforming assets. Therefore, as gold prices shoot up, ETF demand usually spikes up. 

This is clearly evident from the data. Between 2012 and 2015, as global gold prices fell from $1670 a troy ounce to $1160, global jewellery demand rose from 2062 tonnes in 2012 to 2479 tonnes by 2015. 

But between 2015 and 2020, global gold prices shot up from $1160 to $1769; this saw jewellery demand shrink from 2479 tonnes in 2015 to just 1331 tonnes in 2020. Jewellery demand has dipped from 2200 tonnes to 2026 tonnes between 2023 and 2024 as gold prices took off again. 

The 50% plus spiral in gold prices in the last nine months is bound to dampen gold demand in tonnage terms from jewellery buyers. Yes, ETF demand is hotting up, but at about 1100 tonnes a year, this is still a much smaller source of bullion demand than jewellery. High gold prices also prompt households to trade in their old jewellery for cash or use recycling to buy jewellery. This can again pressure prices. 

#4 No valuation floor 

In investing, point-to-point returns can be used to prove anything. Today, many folks are juxtaposing gold’s 10-year CAGR of 16% against the Nifty 50’s 13% CAGR, to ‘prove’ that gold is the better wealth creator in the long run. This comparison is however quite flawed. 

For one, it is only that the long-term return on gold beat equities. Two and more important, the fall in the price of stocks or equity indices are usually checked by valuations becoming attractive enough to buy. 

For gold though, there is no fundamental valuation metric, as it generates no regular cash flows and is priced purely on demand and supply at any given point in time. Gold prices are primarily driven only by global risk factors and not specific to India or any special worth in gold itself. Therefore, if the current worries about tariffs, sovereign debt crises, US slowdown etc abate, gold can see a sharp correction.  There is no way to predict when this risk perception will change. 

In a growing economy like India, it is highly unlikely that the equity markets at large will go back to their values 10 or 20 years ago, because the underlying earnings of companies would have compounded over this period. 

However, gold and silver too can very easily go back to their values 10 years ago because there are no underlying cash flows to put a floor to their prices. Take the Nifty50. Yes, with the post-Covid rally, the index value has moved up from 8100 in October 2015 to 25100 levels by October 2025. However, as index values have moved up, so have the underlying earnings of the Nifty50 companies. These earnings have gone up from Rs about Rs 365 in October 2015 to Rs 1130 in October 2025. 

Therefore, it may be possible for the Nifty50 to fall from 25100 levels to say, 20300 levels if the PE for the Nifty50 firms shrinks from the current 22 times to about 18 times trailing earnings of Rs 1130. But it is the hard to imagine that the Nifty50 will go back to its October 2015 level of 8100, which will work out to 7 times trailing earnings! 

While equities (and bonds too) have a valuation floor based on earnings and interest payouts, commodities like gold and silver have no such valuation floor. 

This rolling return analysis from our recent report (on why gold-plus-silver funds don’t make sense) is helpful to understand why gold like silver, may not be a long-term wealth creator. In the last two decades, it has delivered less than a 6% CAGR over 5 year periods about 23% of the time! This is why we think equities are the best bet for investors looking to compound returns on their portfolio in the long run. 

# 5 Technical targets 

In the absence of any valuation metrics, it is impossible to assign any price target for gold or silver based on their intrinsic worth. Gold’s intrinsic worth is based mainly on perception. However, when an asset is soaring, it is the norm for brokerages to put out rosy reports with eyeball grabbing price targets.  So we now have a Jefferies report saying gold can head to $6000 in the ‘long-term’ and a Bank of America report setting a $5000 target for 2026! There are also umpteen social media experts sharing gold and silver charts with bullish commentary.

Investors should, however, take all these targets with a bagful of salt. Commodity price targets put out by brokers tend to rapidly change with the market mood. Goldman Sachs’ report setting a price target of $200 for crude oil in 2008, based on the ‘peak oil’ theory (which was demolished by the rise of US shale), is a famous example of how such reports go with the flow! The basic tenet of technical analysis is to make the trend your friend and to revise your opinions based on what markets are signalling. Therefore, price targets for gold or silver based on technicals can change the moment the trend changes. 

As we have explained in the past, the main role of gold is that of portfolio insurance. If stocks and bonds crash due to unexpected events, gold rises and shields your portfolio from falling too much. However, insurance cannot make up the entirety of your portfolio! This is why we recommend only a 10-15% allocation. 

Therefore, to reiterate our long-held view, gold can and does play an important role in your portfolio. But its main role is to act as portfolio insurance and not as a wealth compounder. If stocks and bonds crash due to unexpected events, gold may rise and shield your portfolio returns. If you don’t own any gold ETFs in your portfolio, you can start a SIP in gold ETFs to get to this 10-15% exposure. 

Silver is an even more erratic metal than gold. It is more an industrial commodity than a safe haven. To make money from it, you need to enter and exit from it at the right times. Today is not the time to buy silver.