Gold has crossed the $3,000 per troy ounce level, which naturally leads to the question: how much higher can the price go? The answer is that it is hard to guess given that it tends to be related with volatility in the global economy, driven largely by the policies of the US. While it may be tempting to take a view that the direction will only be northwards, it may be prudent to exercise patience here.
Starting from January 2010 when the price was $1,118/ounce, it took 16 months to touch the level of $1,500. This was also the time when the QE started and gold was range-bound for almost two years up to March 2013. It then moved down as this was also the time when the famous ‘taper tantrums’ came up, when the Fed spoke of rolling back on the QE. For almost six-and-a-half years, the price remained at less than this mark (of $1,500) till August 2019, when the 1,500 mark was attained. For the next four years until November 2023, the price hovered in the $1,500-2,000/ounce range, and once averaged above $2,000 in April 2023. Since December 2023, the price has been moving up almost continuously. What can one make of these movements?
Gold has traditionally had an inverse relationship with the dollar, meaning a strong dollar leads to less demand for gold and vice versa. For investors, a weaker dollar made gold more attractive and funds moved to the metal in these phases. The long periods of low range-bound gold price can be related to the stable dollar. Covid did produce a glint for gold when it scaled towards $2,000 and the Ukraine crisis maintained this sentiment. However, the latest episode of price rise has not gone along with this conventional wisdom. The dollar has, broadly speaking, held strong ever since Donald Trump won the elections. His articulations when translated into announcements made the dollar stronger, but gold too has gone up.
Tariff talk has been the chief factor driving the price of gold and hence it is possible that as long as the US President keeps this agenda alive, gold will benefit as a safe haven. To put it in perspective, getting rid of migrants, increasing tariffs and cutting taxes will lead to the Fed being guarded on rates which may keep the dollar stronger for longer, although there have been some recent blips. The uncertainty has kept the price of gold in the upward trajectory.
Demand side factors
Interestingly the overall demand for gold has not really been very different from last year. In 2024 it was 4,975 tonnes against 4,946 tonnes in 2023. Ideally in a year when the dollar has tended to be stronger, gold should have weakened. But this did not quite happen, which points to demand side factors.
To begin with central banks have become major purchasers of gold. This has gained traction especially after the Ukraine conflict where diversification of forex reserves became an objective. When the war started, the US had impounded the reserves of Russia held in US treasuries. This had created some panic in the market; the fear was that what happened to Russia could happen to any other country. Therefore, along with the de-dollarisation theory, central banks began buying gold. In 2024, central banks bought around 1,044 tonnes of gold out of a total demand of 4,974 tonnes, which is around 20 per cent. This will continue as central banks focus on diversification. Some of the more active central banks in 2024 were from Poland, Turkey, China, and Azerbaijan with each bank purchasing over 40 tonnes each.
Alongside, there has been a continuous demand for gold as an investment. This is a factor which would vary with the general market conditions. Presently with global stock markets and currencies being extremely volatile, gold makes a good investment avenue. This demand has been estimated by World Gold Council at 1,200 tonnes in 2024. China and India were the highest consumers here. The ETFs kept witnessing different cycles of demand due to the investors’ preferences through the year. But demand from ETFs has been a major factor driving demand.
Last, the demand for jewellery has been steady with India and China contributing to this demand. But it has been seen that higher gold prices can come in the way of fresh demand as recycling of gold becomes more prevalent. This factor has to be tracked for any change in patterns.
In the current fiscal, the government has also started redeeming the sovereign gold bonds in advance since the rising price has imposed a higher cost. The idea of issuing these bonds was to migrate consumers to the bond route instead of the physical metal to control imports. But given the affinity of Indian households to jewellery, physical demand has been on its regular path. This situation is analogous to individuals still holding on to high currency balances even though digital payments have increased manifold in the last five years or so. There is an urgency to reduce this carrying cost by redeeming these bonds.
It does appear that two segments of demand — central bank and investment — will continue to rise over time which will provide demand for gold. However, the former will be gradual as central banks don’t normally buy in large quantities at any point of time. The US tariff factor would continue to be the main driver here.
If it is assumed that there will be an equilibrium in the next quarter or so, the dollar can be expected to weaken which should bring back the inverse relation with gold. However, based on past trends in movements over different episodes, the new range could more likely be $2,500-2,800 rather than above $3,000/ounce, which may be considered to be a passing phase.
The writer is Chief Economist, Bank of Baroda. Views are personal
