Gold prices surge 73% YTD to record best gains since 1979: Are they ripe for correction next year?

In a year that belonged to the commodity market, gold prices have shone the brightest in 46 years, recording a whopping 73% surge amid a host of tailwinds from geopolitical uncertainty, easing interest rate environment and Trump tariff tantrum.

On the MCX, gold has touched a record high of ₹135,590 per 10 grams. As of Friday's close, it was trading around the ₹1,34,200 level, as investor interest in bullion sustained. Meanwhile, since October 2023, it has more than doubled, rising 139%.

"Gold holds its bid as a portfolio stabiliser rather than a momentum trade. It looks stretched, but the slow grinding towards higher levels is giving the buyers an opportunity to buy on dips," said NS Ramaswamy, Head of Commodity & CRM, Ventura.

Gold is absorbing expectations of further easing next year, but it is also constrained by the absence of a sharp deterioration in real yields or a decisive slide in the US dollar. The December US Federal Reserve's rate cut gave fresh momentum to gold prices after a lull in the rally towards the end of November.

After every high and subsequent corrections, gold has always been consolidating higher again. The US Fed’s quarter-point rate cut reinforces the metal’s role as a macro hedge. With the Fed monetising government bonds again, it has tightened the link between gold and real yields, which remain the dominant driver of investor demand, said Ramaswamy.

However, he cautioned that it is premature to get excited about a decisive gold breakout. "Any surprise news to the market, like comments from the US President or the Federal Reserve, could reverse course and ignite a dollar rally and real yields could firm and test the resilience of the rally. Also, major economic data releases spinning back could prove and turn the Federal Reserve to go on a hawkish note," he added.

But if not an outright breakout, doesn't gold remain susceptible to profit taking following such a sharp run is a genuine concern for investors, who remain split on whether to allocate more to bullion at the current juncture.

Is gold set for a correction?

Analysts believe that an outright collapse in gold prices is unlike as the drivers of gold — geopolitical uncertainty and Fed rate easing — still remain in place.

Ross Maxwell, Global Strategy Operations Lead, VT Markets, said after such a strong year and an increase of 70%, gold prices are vulnerable to a correction, although the fundamental drivers haven’t changed so I would not expect an outright collapse. He said a combination of global uncertainty, geopolitical tensions, central bank buying, expectations of interest-rate cuts, and currency weakness has all created the environment for gold's strong performance.

Echoing similar views, Ventura's Ramaswamy said that a major, sustained correction is considered unlikely given the current global economic environment. Any potential dip is a healthy opportunity for long-term investors to buy gradually, he opined.

Profit taking by short-term traders, any delays in rate cuts by the Fed and other central banks, a stronger US dollar, or easing geopolitical risks can trigger short-term corrections, as per experts. However, they see such corrections in gold as shallow and time-based rather than deep price crashes, especially when structural drivers remain intact.

Gold acts as a hedge during times of uncertainty. Moreover, a fall in the US dollar also increases its appeal for investors of other currencies. Global central banks, too, are on a gold-buying spree as they are trying to diversify their reserves from dollar-denominated assets into gold, which is also driving gold higher.

How should investors allocate to gold now?

Sharing his strategy for investors, Ramaswamy said that any potential dip is a healthy opportunity for long-term investors to buy gradually.

If gold prices hold key resistances, then it could test the October peak. "Resistance seen at $4342 and $4319. Support levels are $4291 and $4256, with a final strength at $4092. Running from $3,935 to $4,350 and beyond so far, requires to test $4246, $4143 and $4,039 for rebuilding the bullish trading books. These could be the entry on dips," he opined.

Meanwhile, Maxwell opined that for investors, the strategy should be balanced rather than reactive. Those who entered at lower levels may consider partial profit-taking while maintaining a core allocation, as gold continues to serve as a hedge against volatility and macroeconomic shocks, he said. For fresh investors, a dollar cost averaging (DCA) strategy to buy on dips is advised.

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.