Rise and shine: Global uncertainties will support a rally in gold prices

Gold has been the best-performing asset in 2025, gaining 28 per cent in dollar terms since January and hitting record levels. Its price has crossed ₹1 lakh per 10 grams in India, though profit booking occurred above the six-figure mark. The price has experienced wild fluctuations over the past month, partly reflecting the flip-flops in United States (US) tariff policy. After spiking to highs after “Liberation Day”, the precious metal lost some ground as US President Donald Trump moderated his stance on tariffs. But it has swung up again due to the continued macroeconomic uncertainties and the likelihood of higher global inflation. As a traditional hedge against inflation and, more broadly, macro uncertainties, the metal tends to be hoarded by households as well as central banks. Indeed, most central banks have increased their gold holding. Although the process started much before tariff-related uncertainties, the unpredictability of the US government has only increased the appeal.

  The correlation between demand for gold and high inflation is well documented and is likely to hold true into the foreseeable future. The volatility in the recent past, where prices swung 3-4 per cent in a day, is due to uncertain US tariff policies. It is likely that given some as yet indeterminate increase in US tariffs, counter-tariffs by trading partners and consequent impacts on supply chains could increase consumer prices. As a result of tariff wars, some commodity traders are predicting that there could be an upside of over 25 per cent in gold prices in dollar terms. The link with the dollar could also lead to other potential effects. One is that a weaker dollar often results in a rise in gold prices because prices are dollar-denominated. There could be implications if US Treasury yields continue to rise and the dollar weakens in tandem. That would signal high inflation and a slowdown in the world’s largest economy, leading to knock-on slowdowns in global activity. This may further accelerate demand for gold. Apart from tariff wars, another policy uncertainty is centred around the possibility of the US deciding to revalue its gold reserves. The US holds around 8,150 metric tonnes of gold, which it values at $42 per troy ounce (around 31 grams). The current price of gold is $3,340 per troy ounce, so a revaluation could alter perceptions substantially. If the US decides to sell part of its reserves, it could significantly affect prices and perception. 

India holds around 876 tonnes in government reserves and households are estimated to hold a whopping 25,000 tonnes. However, it’s worth noting that unlike stocks and bonds, the physical metal does not yield anything. But there is a thriving jewellery industry built on its foundations. The industry needs to manage inventories and conduct Treasury operations carefully in such volatile conditions since retail prices are tied to the price of the day whereas inventories may be bought months in advance in foreign exchange. This could lead to significant swings in profitability. Also, gold loans are a very popular means of raising cash. The gold loan market grew by 76 per cent in 2024-25 and is expected to hit ₹10 trillion in the current year, according to Icra. In this context, the Reserve Bank of India recently proposed regulations designed to reduce malpractices such as “evergreening” gold loans. This is prudent since lenders could be badly exposed if there’s a sudden fall in price. The central bank will have to maintain a tight oversight of this market along with managing its own exposure to the metal, given the volatility in global prices.