Gold Is Well Off the Record High It Hit in January. Is It Time to Buy the Dip?

Gold had an incredible 2025, rallying about 72% and setting multiple all-time highs. The last of those highs came in late January of this year, after the price of the precious metal surged past the $5,000 mark and came within a few dollars of $5,600.

But gold has lost some of its luster since then, and the price has retreated to under $4,400, a 22% decline. The question now is, should investors consider buying gold at this new, lower price?

First, it's worth looking at what drove gold higher in recent years (it's been climbing since late 2022). 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 in the wake of Russia's 2022 invasion of Ukraine and the U.S.'s response of freezing Russia's foreign exchange reserves.

Second, we need to examine what caused the price of the yellow metal to fall from that January high. A major factor is the war in the Persian Gulf, which began in late February of this year. As usual in times of geopolitical stress, global investors sought a safe haven in dollars after the shooting 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 is up about 3% since the day before the war began. The price of gold tends to move in the opposite direction to the dollar because gold 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, a non-yielding asset that pays no interest and thus becomes less valuable when rates rise.

Image source: Getty Images.

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.

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.

Gold's price will continue to track the war

So, in the short term at least, 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.

But 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.

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.

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.