Is now the time to sell gold?

With Iran and Israel at war, gold has returned to all-time highs and front-page headlines. In our view, this rally presents a timely opportunity to reduce exposure and take profits—even if it means potentially missing another leg up.

Since January 2023, the gold price has nearly doubled in Australian dollar terms. In 2025 alone, it’s up almost 25%.

What that means in wealth creation terms is quite remarkable. In December 2022 there was roughly US$12 trillion worth of wealth in above-ground gold. Thanks to this rally – there is now US$24 trillion in gold. Almost US$12 trillion in paper wealth has been created in 36 months.

Everything that could have gone right for gold investors has gone right—and very quickly too.

Historically, five things support the gold price:

1. Geopolitical uncertainty
2. A weakening US dollar
3. Falling US Treasury yields
4. Retail investor demand (best tracked via ETF flows)
5. Central bank buying

Over the past 18 months, all five have aligned.

Geopolitical risk – as measured by the widely-followed Caldara and Iacoviello GPR index – has remained well above its long-term average for almost three years straight. The US dollar has begun to weaken, and Treasury yields have softened—both trends reinforced by Trump’s fiscal and trade policies.

Retail investor enthusiasm is also surging. From January to April 2025, global gold ETF inflows were at multi-year highs, and media coverage has helped bring gold into the mainstream.

Central banks, too, have been major buyers. Since 2022, they’ve added gold at record levels, partly in response to the US using its control of SWIFT for geopolitical purposes. In Q1 2025, central banks added 244 tonnes to their reserves—24% above the five-year quarterly average.

But what more can go right?

Much of the bull case for gold appears priced in. Unless a new, unforeseen crisis emerges, the upside from here in the near term looks limited, in our view.

In fact, risks are increasingly skewed to the downside.

Recent data shows signs of profit-taking. The week ending 16 May 2025 saw the largest outflows from gold ETFs since 2022, particularly in the US. This matters: US ETF flows are closely correlated with short-term price movements. By contrast, Asian ETF investors tend to be longer-term holders.

The Israel-Iran conflict, while serious, may cool. Over the weekend, both countries exchanged missile strikes. However, the United States remains the dominant power in the region. President Trump has already signaled a desire to end hostilities and has previously pressured Israeli leadership to de-escalate. In December 2024, shortly after his election, Trump dispatched envoy Steve Witkoff to Tel Aviv to help broker a ceasefire in Gaza and Lebanon.

Meanwhile, central bank demand—while still strong—is showing signs of moderation. The 244 tonnes purchased in Q1 2025 represent a 33% decline from the previous quarter and nearly 50% below the peak in Q2 2022. This suggests a reversion toward pre-COVID buying patterns.

Conclusion

Gold remains a valuable portfolio diversifier. Since gold was liberalised by then-president Richard Nixon in 1971, gold’s price return has been similar to the S&P 500.

(Pre-1971, gold prices were centrally controlled. As such, gold price data from before this date is not a useful guide to today. From August 1971 – June 2025, gold has grown on a 8.5% CAGR, compared with the 7.8% CAGR of the S&P 500 Price Return Index. See chart above).

Many investors hold up to 5% as a form of portfolio ballast. But after a strong two-year run, this may be an opportune moment to rebalance.

No one sells at the top perfectly. But in markets, it’s often better to take a good profit than to chase a perfect one.

What to buy instead?

As well as flights to safety, volatility also triggers “flight to quality” trades. In this environment, US quality stocks—such as those captured in the ETFS US Quality ETF (CBOE: BEST) —offer an alternative. Quality stocks have, historically, recovered from corrections more quickly. They have also outperformed in some market conditions.