The Glitter of Growth

With galloping prices of gold the world is now unmistakably in a ‘gold bet’. On Tuesday, April 22, global gold prices hit the roof when the yellow metal traded briefly for $3,500 per ounce (one ounce is equal to 28.35 grams). In India, the precious metal crossed the psychological barrier of ₹1 lakh for 10 grams, the highest price until now. As matters appear, it is unlikely that prices will cool significantly in the days ahead.

Much of the spike in global gold prices has to do with the uncertainties swirling around the global economy. The story can be best seen in the chart of global gold prices since early this year. After a blip like the increase last year in October, gold prices began a typical wobbly trajectory for the remaining part of the year. Then suddenly, in January, after Donald Trump became the US president for the second time, these prices began spiking. But the big bump up began in April, especially on April 9 when the Trump tariffs were paused for all countries except China. That day, gold prices briefly crossed the $3,000 mark. Since then, they have only gone up.

TRADITIONALLY, A MAJOR driver of gold prices in India is the autonomous consumption of gold for jewellery. In 2023, India imported $45 billion worth of gold. This increased by 5 per cent in 2024 when the country purchased nearly 803 tonnes of the metal. But there was a catch. Unlike previous years when buying was done largely by households for jewellery (consumption) and investment purposes, in 2024 this took a hit as gold prices were relatively high that year. This part of the demand went up by a modest 2 per cent to 563.4 tonnes while demand for investment purposes grew rapidly, by 14 per cent to 239.4 tonnes. The Indian central bank has the seventh largest gold stock of 876 tonnes. Last year, the Reserve Bank of India (RBI) purchased 72.6 tonnes of gold, making it the second biggest buyer of the metal after the Polish central bank that bought 89.5 tonnes in 2024. This year, between January and February, RBI added another 2.6 tonnes to its gold stock.

RBI is not alone in these massive purchases of gold since 2022 when the war in Ukraine began. Since then, global central banks have added gold to their reserves and have aggressively purchased 1,000 tonnes every year. Much of this has to do with geopolitical uncertainty and the prospects of conflict in differ­ent parts of the world. The two ‘active’ conflict theatres in the world—Gaza in the Middle East and Ukraine—have caused havoc over the years in global commodity prices. Wheat, fer­tilisers, crude oil—until very recently—and a host of other commodities have seen volatility in prices and availability. In such situations, it is not unusual for central banks to seek hedges against the erosion of value of assets they hold. Gold, in this con­text, is the ultimate safe haven as a store of value.

The use of gold as a store of value is especially attractive when other assets become unfavourable. This can happen when in­flation rises or interest rates are tinkered by governments and central banks. This can be for reasons like devaluing currency to make exports attractive. In the case of countries like China, where such movements in currency are not apparent imme­diately, artificial devaluing of currency is a device to prop up exports. This and other mercantilist measures by China are a key reason for the Trump tariffs. While Trump has listed virtually all countries as responsible for “gouging” the US, he has especially targeted China in this regard. But his actions have injected even more uncertainty into the global economy. The economic effects are bound to be negative and under these circumstances, it is not surprising that gold prices are on fire.

Even before Trump had taken office, private investment banks were projecting a rise in gold prices. But no one could es­timate the sheer gallop in these prices. One estimate suggested that prices would be around $2,750 per ounce in the first quarter of calendar 2025 and would go up to $2,950 in the fourth quarter. In the event, these proved to be an underestimate and in April itself, prices touched $3,500. They continue to hover around $3,300 or so.

What are the drivers of gold prices? At a macro level gold prices correlate with the US dollar and US interest rates. A lower value of the dollar and low interest rates in the US push gold prices up. With the coming of the Trump tariffs, the value of the dollar has eroded considerably. One measure of the dollar’s value is the DXY index, an index of commonly traded curren­cies. The dollar has lost around 10 per cent in DXY terms since mid-January to a low three days ago.

This erosion has been accompanied by changes in the US 10-year treasury yields: the movements of these yields going down to their very recent highs have led to what traders call a ‘Gold Smile’. As the yields fall, the price of gold also falls and as yields begin to inch up, the price is also inched up. Bond yields and bond prices are related inversely: a rise in bond yield implies lower prices and lower bond yields signal higher prices.

Where will gold prices go from their current highs? A lot depends on the course adopted by the US and, in particular, what Trump decides. In case tariff-related disputes and the tit-for-tat tariffs lead to a disruption in trade, higher inflation and in general weaker global economic growth, it is likely that gold prices will continue their upward trajectory.

In April, the International Monetary Fund (IMF) shaved off around 0.5 percentage points from global growth over its January forecast for 2025. This was originally pegged at 3.3 per cent in January. This was even as it raised the estimate for global inflation slightly. Apart from the dollar and US interest rates, these factors are bound to further increase gold prices if IMF’s forecasts come true.

What about gold prices cooling down? What are the possible conditions under which that can happen? For that to happen, trade-related tensions, especially between the US and China, would have to decline considerably. If that happens—and that is a big if in the current situation—the chances of the US Federal Reserve reducing interest rates is a possibility. In that case, the ‘Gold Smile’ will disappear but somewhat slowly. It should not be forgotten that gold is a hedge against uncertainty: bringing back a modicum of certainty in global economic affairs will require more than soothing statements.

SO FAR, THERE are no such signs. Trump’s attitude towards China is marked by wild swings. To start with, he wanted to “make a deal” with China. Then came the escalating tariffs; then there was news that China was willing to cut a deal with the US and finally, in recent days, Trump has again signalled a conciliatory approach. In such a situation, gold prices are bound to remain elevated. Suppose he were to say that tariffs would not be applied on China, even that would not calm the markets as such statements by the US president are liable to summary reversals.

At the moment, Trump confronts difficult choices. He wants to reduce the US’ trade deficit with other countries, but above all with China. This is not a simple matter of merely erecting high tariff walls and forcing companies to relocate to the US. Two problems confront him on the way. One, the US does not have the manpower, the necessary supply chains of all manner of intermediate and other goods required to engage in high-end manufacturing. This also requires an ‘industrial policy’ ap­proach, something that has been anathema to the US which has championed free trade and open markets. An “industrial policy” cannot be ordered and delivered within a short span of time. It requires a comprehensive assessment of end goals and current capabilities. In the US case it also requires science and technological manpower that the country is woefully short of.

The other issue in reaching this goal is the temporary, transi­tional pain in case of trade frictions. Consumer goods may not be easily available even as imports are discouraged. In countries where populations are used to being deprived of consumer goods, this situation can be controlled. But can the US manage this situation without domestic unrest and political pressures to end the tariff wars?

While these concerns are removed from the immediate swings in gold prices, they lie at the root of the search for safety by investors. Until recently, American treasuries were the ulti­mate store of safety. With the gyrations in US policy and the total disarray in policymaking, investors are reaching for gold even as the yellow metal’s prices are touching stratospheric heights.

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