Limits of the global gold rush

Driven by increased demand, international gold prices are at record highs, surging over 30 per cent in the past two years.

Price increases have been much sharper in Indian markets. The recent price movement contradicts an important theoretical characteristic associated with gold. Since gold does not generate any cash flow, the opportunity cost of holding it is low when interest rates are low. However, gold prices have increased significantly even as global interest rates are at a multi-decade high. Officials at the US Federal Reserve are signalling that interest rates may remain higher for longer.

Prices have also risen despite a relatively strong US dollar. Since gold is a dollar-denominated commodity, prices tend to increase when the dollar weakens.

One of the main reasons for increasing gold prices is sustained buying by central banks. Even as exchange-traded funds saw an outflow in the first quarter of 2024, for instance, central banks continued accumulating gold. According to the World Gold Council (WGC), central banks accrued 290 tonnes of gold during January-March 2024, a record for the first quarter. Among the leading buyers were the central banks of China, India and Turkey. Central bank demand is projected to remain robust in 2024.