Gold's Recent Performance and Market Dynamics
Gold has experienced a significant journey in recent years, with its price reaching impressive heights. In 2025, gold surged by about 72%, setting multiple all-time highs. The last of these highs was achieved in late January of this year when the price of the precious metal surpassed the $5,000 mark and came within a few dollars of $5,600. However, since then, gold has lost some of its luster, with the price retreating to under $4,400, marking a 22% decline.
The question now is whether investors should consider buying gold at this new, lower price. To understand this, it’s important to look at what drove gold higher in recent years. Much of the increase in gold's price was due to central banks around the world stocking up on gold in order to diversify away from the dollar following the 2022 invasion of Ukraine by Russia and the U.S.'s response of freezing Russia's foreign exchange reserves.
Factors Influencing Gold's Decline
The price of gold fell from its January high due to several factors. A major contributor was the war in the Persian Gulf, which began in late February of this year. As is typical during times of geopolitical stress, global investors sought a safe haven in dollars after the conflict began.
As measured by the U.S. dollar index, which gauges the value of the U.S. dollar relative to a basket of foreign currencies, the dollar has risen about 3% since the day before the war began. Gold tends to move in the opposite direction to the dollar because it is priced in dollars globally.
Rising inflation this year, partly due to higher fuel costs from the war, has also pushed interest rates higher, which is bearish for gold. This is because gold is a non-yielding asset that pays no interest and thus becomes less valuable when rates rise.
Central Bank Actions and Inflation
In addition, several central banks, most notably Turkey, have had to sell gold reserves to stabilize their currencies amid the ongoing war in Iran, driving the price lower on global markets. As stubbornly high inflation persists, the Federal Reserve is likely to become more hawkish on monetary policy this year to combat it, possibly hiking its target interest rate later this year and further undermining the appeal of gold for investors.
Long-Term Outlook for Gold
Despite the current challenges, gold's price will continue to track the war. In the short term, the price of gold will depend heavily on when the Iran war concludes. When that happens, oil prices should retreat from their recent spike, and the dollar will likely become cheaper, both of which will prop up gold prices.
In the longer term, I expect central banks around the world to resume their gold purchases as they seek to build reserves that are less dollar-centric. Also, having a small portion of your portfolio invested in gold is always prudent, as it remains a strong hedge in times of chaos or large market pullbacks.
Investment Options in Gold
Two ways to invest in gold are the SPDR Gold Shares ETF (NYSEMKT: GLD), the world's largest physically backed gold fund, and the VanEck Gold Miners ETF (NYSEMKT: GDX), an exchange-traded fund that tracks the overall performance of companies involved in the gold mining industry.
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Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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