The paradox of value is a concept taught in the Economics classroom. As per this concept, diamonds, which have little use, are priced high, while water, which is necessary, is cheap. This is due to the marginal utility attached to the product as well as scarcity, which prices them differentially. The same holds for gold, which has witnessed a steep increase in price this year. This poses the question: Will it rise any further?
Let us look at how the price of gold has moved in the last few years. From $1,462/ounce in FY20, it rose gradually to average $1,988 in FY24 and then rose sharply in FY25 to $2,594. For the current year it averages $3,465. But in these seven months or so, it rose from $3,207 in April to $4,053 in October.
The issue is not just one of price and value of investment. Gold has a weight of 1.08 per cent in the consumer price index, which means that the present inflation numbers on the core side (which excludes food and fuel items) are largely up due to it. This can pose a conundrum when setting the repo rate.
The other problem is on the imports side, where the bill has been increasing even though physical consumption has not surged to the same extent. In FY24, India imported 795 tonnes, which came down to 757 tonnes in FY25. For the first seven months of this year, the amount is quite reasonable at 300, though this will increase sharply in November and December, which is the wedding season. Gold now accounts for almost 9 per cent of the total imports of $451 billion in the first seven months of the year.
So why has gold demand gone up? First, since the Ukraine war broke out, the dollar has tended to be volatile. Gold has an inverse relation with the dollar. When the dollar weakens, gold tends to strengthen. Today, the view is that with the US Fed cutting rates, the dollar would only weaken, which is a prop for gold. However, if the Fed is slower on cutting rates, the dollar will remain strong and gold will stabilise.
Second, investors and speculators have used the weaker dollar pillar to take positions in the futures segment, thus pushing up the price. They may not take delivery and square off their positions, but do add to the momentum.
Third, individuals in China and India — the two largest consumers — have been buying gold in expectation of the price increasing further. Demand is for a physical purpose, but adds to the price spiral.
Fourth, ETFs have been a major driver of demand. They mandatorily keep as much as 70-80 per cent of the fund backed in physical gold. This has kept the price ticking.
And last, central banks have been diversifying their forex reserves away from currency to gold to eschew concentration in a specific currency. This is part of the de-dollarisation process.
The tariff shock has been largely absorbed in the global system with several deals being made. The future of the US economy is still uncertain. Rates could remain stable on balance. This means that a sharp upside looks less likely. But can the price dive downwards? One can’t say for sure. However, in the short term, the boom seen in 2025 may not be replicated unless there is another shock.
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