Gold: Sizzling rally | Photo Credit: brightstars

Global investment managers are increasing their allocation to gold and positions in gold derivative contracts are surging

Headlines such as “Gold on fire again, moves beyond $4000”, “Gold storms past ₹1.26 lakh/10 g in Delhi,” “Gold goes parabolic,” are becoming increasingly frequent as gold has been charting a blistering rally over the last two months. No one is really complaining since the returns have been quite exhilarating, at 51 per cent gains so far this year in US dollar terms. The gains are even higher in India at 57 per cent, with the rupee depreciation adding to the returns.

But there is a touch of nervousness among investors, with many wondering whether to buy more gold now or to sell their current holding. To answer these questions, we need to understand the drivers of this rally. According to World Gold Council, demand for gold comes from three sources. Jewellery buyers who account for around one-third of the demand, investors in gold ETFs and gold bars and coins who account for 44 per cent and central banks which account for roughly 15 per cent.

The ongoing rally is not driven by gold jewellery buyers since consumption demand tends to become tepid when prices surge. Demand from gold jewellery buyers was down 14 per cent in the second quarter of 2025. Central bank purchases are also 21 per cent lower in this period. But investment demand has zoomed 78 per cent. Gold exchange traded funds had sold 7.1 tonnes of gold in the second quarter of 2024, but they have purchased 170.5 tonnes in the second quarter of 2025.

What is heartening is that the investment flows into gold ETFs appears to be led by a long-term strategic shift in asset allocation by global fund managers. This is evident in Morgan Stanley’s chief investment officer Mike Wilson’s note in September recommending a 60/20/20 portfolio strategy with 60 per cent allocation to equity, 20 per cent to gold and 20 per cent to fixed income securities.

The note is implying that the fund manager expects gold prices to continue giving healthy returns well in the future. This is a departure from the past when even the riskiest portfolios contained only 10 per cent in gold denominated assets. Speculative positions in gold future contracts are also hitting record levels. With both global funds and speculators now arriving at the party, the celebrations could well continue much longer than most expect.

Why are gold ETFs buying?

Both individual investors as well as investment funds appear to have made large bets on gold since the beginning of this calendar. With ETFs being the preferred vehicle for gold investment, they have been receiving copious inflows. The ETFs have therefore turned large buyers of gold in 2025. Between January and August 2025, gold ETFs purchased 472.7 tonnes of gold and increased their assets under management by $46.8 billion. North American and European funds are buying the most gold since June though Asian funds were large buyers in the first quarter. This is in sharp contrast to recent past when ETFs were net sellers of gold between 2021 and 2024. They had sold gold amounting to 549 tonnes in this period.

Several factors seem to have made investors nervous, pushing them towards gold. One, Donald Trump’s irrational trade and migration policies which have thrown global trade in disorder and caused major challenges for companies in the US and elsewhere. Two, the US economy is beginning to falter due to these policies with GDP growth for 2026 being revised lower to 1.4 per cent. Three, with the US Fed acknowledging the underlying weakness in the economy and beginning to cut rates, the US dollar has been sinking over the last few months. With investment managers expecting the dollar to stay weak for extended period, they appear to be diversifying into gold. Four, the US stock market is trading in overvalued territory, making equity investments increasingly risky.

Investors seem to have turned to gold to avoid the pitfalls from a wobbly economy and pricey stock market. ETFs purchased around 341.5 tonnes between January to April this year. There was a mild selling in May of 19.1 tonnes as trade deals were struck with many countries. But the purchases have resumed since June, with 150 tonnes purchased between June and August.

Trading interest surges

Along with investment buying, short-term traders have also increased their participation in gold derivatives. Since trading in gold futures and options does not always involve actual buying and selling of physical gold and provides the leverage to trade many times the initial capital, this activity can propel prices much higher than warranted.

Data from world gold council show that the open interest in some of the largest gold trading platforms currently stands at lifetime high. As on September 26, 2025, total open interest, which includes buying and selling transactions, amounted to $254 billion. This is 135 per cent higher than $108 billion of outstanding positions in February 2024.

The report on the commitment of traders published by the Commodity Futures Trading Commission (CFTC) is implying that professional money managers are turning bullish on gold. Net long positions or buy positions of investment managers in gold futures and options increased from 349 tonnes in May 2025 to 493 tonnes towards the end of September, jumping 41 per cent in four months.

Strong linkage

There is a strong linkage between gold price movement and purchase of gold by ETFs (see graphic). Correlation between the two variables between 2003 and 2025 is a strong 0.89.

But despite the gold purchases in 2025, total holding of gold by ETFs has not yet surpassed the previous peak. ETFs held 3,691 tonnes of gold towards the end of August 2025. But this is slightly below the peak of 3,884 tonnes recorded in April 2022. The numbers show that continued purchases by ETFs along with speculative buying can keep prices elevated.

Published on October 10, 2025