Gold as the New Reserve

Blessed are those who have invested in gold, in one form or another, for now the yellow metal must yield an ROI of far more than a hundred per cent that no other product in the market can come close to. Ironically, successive governments in the past had launched gold monetisation schemes to discourage investment in gold vis-à-vis other products in the money market, but with little success; today, with the tables turned, those who invested in gold seem to have the last laugh. On the eve of Diwali, gold prices hit an all-time high of around Rs 1,28,200 per 10 grams, marking a 63–66 per cent increase year-to-date, far outpacing major stock indexes and cryptocurrencies. Analysts predict continued upward momentum, with potential for Rs 1,50,000 per 10 grams by 2026. Central banks of China, India, and other BRICS nations aggressively accumulating gold to diversify away from US Treasuries and the dollar is not the only reason behind the skyrocketing gold prices. According to experts, a combination of macroeconomic and geopolitical factors is responsible for a sudden surge in gold prices, such as rate-cut bets, robust inflows by exchange-traded funds (ETFs), and, more importantly, the tariff hikes by the Trump administration that led to supply chain disruptions.

It all seems to have originated in the U.S. Aggressive Federal Reserve rate cuts, increased U.S. deficit spending, M2 money supply (liquid assets like savings deposits, mutual funds, etc., plus M1—money in circulation) led to stagflation, eroding the value of fiat currency. The US dollar has plunged 11 per cent in the first half of 2025, the biggest drop in the last 50 years. The result was de-dollarisation. Global trade in energy and commodities has increasingly used gold instead of the dollar, leading to exponential appreciation in gold’s value.

Rising gold prices have varied consequences on the economy depending on factors such as the economic strength of a nation, balance of trade, foreign exchange reserves, investors’ behaviours, global developments, and so on. A surge in gold prices has mixed effects: on one hand, it preserves wealth and acts as a bulwark against inflation, while on the other, it disturbs trade balances and may adversely affect consumer purchasing power. As a whole, the rise in gold value signals future economic uncertainty due to potential recession or debt expansion, as investors avoid riskier products in the market, such as stocks, mutual funds, and cryptocurrency, and prefer physical or digital gold instead. Credit markets may come under pressure as higher gold prices increase the value of collateral and create higher loans; resultantly, stringent monetary policies would increase borrowing costs as well. Even speculative borrowing is a possibility, which pumps more liquidity into the markets, pushing inflation further and eventually affecting overall economic competitiveness.

According to the World Gold Council (WGC), India tops the list of 13 countries followed by China, the US, Turkey, and Thailand in gold consumption, and as such, India’s savings and credit markets are uniquely influenced by gold price movements. Almost all the gold in the country is imported, as production at home is nominal. India’s gold imports jumped to USD 9.62 billion in September 2025 (up from USD 4.65 billion a year earlier), as the RBI increased gold’s share in foreign reserves to 14 per cent in 2025. The rise in gold prices widened the Current Account Deficit (CAD), pushing it to a 13-month high of USD 32.15 billion. Notably, in India, where gold has more cultural value than exchange value, the share of jewellery has declined to 64 per cent in the second quarter of 2025, from 80 per cent in the same period in 2023. Conversely, investment demand (in bars, coins, and gold-related products) increased from 19 per cent to 35 per cent over the same period. Consequently, profit margins of electronics and jewellery manufacturing industries dependent on gold may decline.

According to studies (researchgate.com), regional differences—South India’s robust gold loan ecosystem influenced by sociocultural narratives, North India’s reliance on informal credit rather than gold-based lending, and urban West India’s shift to financial instruments like ETFs or sovereign gold bonds from physical gold—will play a significant role in bullion markets.

However, the impact of rising gold prices can be more positive than negative for India. A rise in gold prices increases disposable incomes and boosts consumption in other sectors. According to Morgan Stanley Inc., Indian households hold a staggering USD 3.8 trillion of gold, equivalent to 88.8 per cent of the country’s GDP—the highest in the world, surpassing the combined gold reserves of many top central banks. It reflects the deep cultural and economic importance of gold in India, used for savings, investments, and cultural needs. A study by The Economic Times showed that household debts reached 42 per cent of GDP by the end of FY 2024. There can never be a more opportune time for households to comfortably bail out of debt, thanks to rising gold prices. It is an opportunity for the economy as well, since the gold possessed by individual households and religious trusts or temples can be a potential hedge against inflation, if only prudent policy interventions are made.

A few schemes were launched in 2015. Sovereign Gold Bonds (SGBs) were debt funds as an alternative to physical gold. These government securities, with 2.75 per cent interest, were redeemable at the market price of gold. However, since the bonds are not secured by physical gold and their price is at a high premium vis-à-vis the market price, the scheme couldn’t deliver the expected results. The Gold Monetisation Scheme was a modification of the Gold Deposit Scheme of 1999, aimed at mobilising physical gold from households to banks, with an interest payable at 2.25–2.50 per cent. But the hitch is that since a large part of gold is not officially accounted for, people apprehended the potential risk of harassment from the Income Tax Department. Other disincentives include the eight-year lock-in period and tax on interest gained. Perhaps revisiting the schemes may help. Even though gold was a relatively lesser-yielding investment until now, one important reason for preferring gold to other products in the market was the waning trust in financial institutions, in stock markets—often notorious for ‘pump and dump’ scams—and in dubious real estate ventures that affected not only sentiment but also fundamentals.

To sum up, gold is a double-edged sword; while it makes the economy resilient in times of crises, it can also upend the trade balance and create a credit crunch. However, rising gold prices in the short run may not be a threat to India’s growth in the face of its strong fundamentals. Nevertheless, efforts are necessary to correct the CAD by reducing import dependence, regulating foreign exchange, ensuring diversification, and taming the Debt-to-GDP ratio in order to contain inflationary pressures and recessionary trends in the long run. Improving the banking sector’s performance, regulating financial markets, and adopting consumer- and business-friendly tax regimes, like the recent GST reforms, can be effective measures in these difficult times of geopolitical tensions and global trade uncertainties.

Views expressed are personal. The writer is a former Additional Chief Secretary of Chhattisgarh