The recent surge in gold prices has sparked widespread debate and concern. On Wednesday, gold prices hit a record high, with 10 grams of 24-carat gold reaching an unprecedented Rs 88,000. While some see this as an investment opportunity, for many, especially the middle class, it has turned a dream into an unaffordable luxury. The timing is particularly significant, given the ongoing wedding season in India, where gold plays a central role in cultural traditions. But beyond personal affordability, a larger question looms: What does this meteoric rise in gold prices indicate about the state of the global and national
economy?
The sharp increase in gold prices is not just a seasonal fluctuation. It is a reflection of multiple economic and geopolitical factors at play. One of the major contributors is the Reserve Bank of India’s (RBI) growing gold reserves. In 2024 alone, the RBI purchased 72.6 tonnes of gold, increasing its total reserves to 876.18 tonnes, valued at $66.2 billion. This marks the highest annual gold purchase since 2021 and the second highest since the RBI resumed buying gold in 2017.
During a recent Parliament session, Congress MP Manish Tewari questioned whether India’s rising gold purchases indicated a move away from the US dollar or an attempt to establish alternative international settlement mechanisms. Finance Minister Nirmala Sitharaman, however, clarified that India’s increased gold reserves were not intended to challenge the dominance of the dollar but rather to diversify the RBI’s asset portfolio. Gold, along with other foreign currencies, remains an essential part of India’s foreign exchange reserves.
Globally, central banks are also hoarding gold. By mid-2024, central banks worldwide had collectively acquired 1,037 tonnes of gold, and this number is steadily increasing. Countries are turning to gold as a safe haven amid growing geopolitical tensions, including conflicts in West Asia, the Israel-Hamas war, and the ongoing Russia-Ukraine crisis. Additionally, a weakening rupee against the US dollar has made gold imports more expensive, further fuelling the price surge.
Historically, gold has been seen as a hedge against inflation and currency depreciation. When stock markets become volatile and economic policies remain uncertain, investors turn to gold as a safeguard. The latest increase in gold prices can be linked to multiple economic factors like rising global tensions have made investors cautious, leading them to seek refuge in gold. Uncertain stock market conditions are pushing investors towards safer assets. A weaker rupee means higher gold import costs, making gold more expensive domestically. RBI and other global central banks are actively increasing their gold holdings.
The situation in the United States is also influencing gold prices. The Trump administration’s tariffs on China, Mexico and Canada have led to inflationary pressures, prompting investors to shift towards gold. Additionally, the US dollar index recently crossed the 109-point mark, impacting commodity markets, including gold. Large bullion banks have responded by shifting gold reserves from Asian hubs like Dubai and Hong Kong to the US, capitalising on higher future premiums. These movements suggest that gold prices may continue their upward trend.
While investors may celebrate the rising value of gold, for the average Indian household, particularly the middle class, the scenario is grim. The wedding season, which typically witnesses a surge in gold purchases, is now facing a slowdown. Families are either postponing their gold purchases or reducing the quantity they buy due to soaring prices. This is directly affecting India’s jewellery industry, which relies heavily on wedding-related demand.
Industry experts predict that gold demand may increase by up to 10% in the coming months, given the seasonal spike. However, this demand will largely be limited to affluent buyers. Many middle-class consumers are struggling to keep up, forcing them to either settle for lighter jewellery or explore alternative investment options. The increased gold prices also mean that jewellers may face a decline in overall sales, leading to reduced business turnover in an industry that contributes significantly to India’s economy.