Gold Price Surge: Value, Demand, and Why It May Not Sustain

Context

Gold prices have risen sharply in 2025, causing concern about whether this increase is sustainable and how it will affect India’s inflation, trade balance, and monetary policy. This has brought the economic idea “Paradox of Value” in light as it explains why gold continues to hold high value even though its direct utility is limited.

What is the Paradox of Value? How Does It Relate to Gold?

1. The paradox of value is a classic economics idea:
   1. Water is essential for life but usually cheap.
   2. Diamonds are not essential for survival but are extremely expensive.
2. This happens because prices are influenced from 2 things:
   1. Marginal Utility (extra satisfaction from one more unit): Higher marginal utility means higher prices.
   2. Scarcity (How much a resource is available): The less the resources are available (more scarcity), the higher the price.
3. This relates to gold as:
   1. Gold is similar to diamonds. It is not essential for survival like food or water.
   2. But it is scarce, socially valued, and used as a store of value, especially during uncertainty.
   3. This combination of scarcity + perceived safety + cultural demand keeps gold highly priced, even though its direct “use value” is limited.

Trend of Gold Prices

1. Gold prices have been increasing steadily in recent years and saw a sharp rise in 2025, which many call a “golden surge” (a sudden big increase in gold value).
2. This rise happened mainly because of global economic uncertainty (no clarity on world economy), volatile dollar movement (US dollar going up and down irregularly), and geopolitical tensions (conflicts between countries).
3. During such times, people buy gold as a safe-haven asset (investment used for safety when other assets are risky).
4. The increase is mostly due to investment demand (people buying gold to invest), financial hedging (protecting money from risk by keeping value safe), speculative trading (buying only to sell later at a higher price), and ETF buying , not just because of jewellery demand.

Why Are Gold Prices Rising?

1. Dollar Volatility and US Interest Rates
   1. Gold usually has an inverse relationship with the US dollar.
   2. When the dollar weakens, global investors move into gold, and its price rises.
   3. After the Ukraine war, global uncertainty increased and the dollar became volatile.
   4. If the US Federal Reserve cuts interest rates, the dollar may weaken further, which supports higher gold prices.
   5. But if the Fed is slow in cutting rates, the dollar remains strong and gold may stabilize or rise less.
2. Speculation in Futures Markets
   1. A futures market is where traders bet on future prices of assets like gold.
   2. When traders expect gold prices to rise, they buy gold futures contracts and Gold ETFs for quick profit and later close their trades without taking real gold.
   3. This speculative trading increases demand pressure, which pushes prices up or down in the short term and leads to high volatility.
3. Physical Demand from China and India
   1. China and India, being the largest gold consumers, buy gold heavily for weddings, savings, and protection against inflation or uncertainty.
   2. When people expect prices to rise, they buy more immediately, creating higher demand that pushes prices up further, even if import volumes haven’t increased sharply.
4. Role of Gold ETFs
   1. A Gold ETF typically keeps 70–80% of its value backed by physical gold.
   2. When investors buy more ETF units, the fund must purchase additional physical gold to support it.
   3. This creates a steady institutional demand, which pushes gold prices upward.
5. Central Bank Buying and De-dollarisation
   1. Many central banks are diversifying their foreign exchange reserves.
   2. Instead of holding too much in US dollars, they are buying more gold.
   3. This is part of “de-dollarisation” – reducing dependence on a single currency (the dollar) for reserves.
   4. Central bank buying adds large and stable demand, which pushes prices up and keeps them elevated.

How Does the Gold Surge Affect the Indian Economy?

1. Impact on Inflation (Core Inflation and CPI)
   1. In the Consumer Price Index (CPI), gold has a weight of around 08%.
   2. Core inflation means inflation that excludes food and fuel but includes items like gold, housing, clothing, etc.
   3. When gold prices shoot up, they increase core inflation, even if food and fuel are stable.
   4. This makes it harder for the RBI to decide the repo rate because:
      1. Repo rate cuts support growth
      2. But rising core inflation may argue against cutting too much
   5. Impact on Imports and Trade Balance
      1. India depends heavily on imported gold, as domestic production is very limited.
      2. Even though import quantity has not increased sharply, the value of imports has risen a lot because gold prices are very high.
      3. Gold now forms a significant share of India’s import bill, reducing space for productive imports like machinery, technology, or energy.
      4. High gold imports worsen the trade deficit (when imports exceed exports).
      5. A higher trade deficit puts pressure on the rupee, contributing to currency weakening.
   6. Impact on Investors and Households
      1. Households see gold as a safe, traditional and emotional asset.
      2. When prices rise sharply:
         1. Early investors gain
         2. New buyers face the risk of buying at the top if the surge does not last
      3. Gold also locks up savings which could otherwise go into productive investments like businesses, equities, or infrastructure.

Is the Gold Rally Sustainable?

1. The recent surge in gold prices has already absorbed major shocks such as trade tariffs and global economic uncertainty, so the rapid rise seen in 2025 is unlikely to continue at the same pace.
2. The future of the US economy and interest rate decisions remain uncertain. If interest rates stay stable, gold may not rise sharply because investors often shift to interest-earning assets.
3. For gold to climb significantly again, it would likely require a fresh global shock, such as a geopolitical conflict, financial crisis, or severe recession, which increases demand for gold as a safe-haven asset.
4. Therefore, instead of asking whether gold will rise further, the real question is whether the risk–reward balance remains favourable for investors in the current environment.
5. Overall, a continued mild upward trend is possible, but a dramatic boom similar to 2025 is not very likely in the short term without a major external trigger.

Implications

1. Macro level: Higher gold prices affect inflation, imports, rupee stability, and monetary policy decisions.
2. Household level: Gold remains attractive but may carry higher price risk after a steep surge.
3. Global level: Gold reflects trust, fear, and de-dollarisation trends, not only jewellery demand.

Challenges  Way Forward

Conclusion

Gold’s recent surge reflects not only economics but also emotion, fear, and global uncertainty. While gold has delivered strong returns in 2025, the conditions that drove this boom may not last. For India, the challenge is to manage inflation, control import pressures, and guide household savings towards a balanced portfolio, while recognising that gold will remain an important but risky asset in times of global flux.