Economy Explainer: Why Are Gold Prices Rising? 5 Key Reasons Explained

Gold prices continue their record-breaking rally, with spot rates climbing to an all-time high of $3,300 per ounce. Domestically, MCX gold futures surged to a historic high of ₹95,000 per 10 grams, reflecting the strength of the global uptrend. 24K gold traded at ₹95,170 per 10 grams, while 22K gold stood at ₹87,190 per 10 grams in the domestic market. 

In a significant revision, Goldman Sachs has raised its gold price forecast to $3,700 per ounce by the end of 2025, citing robust investor demand and sustained central bank purchases. The investment bank also flagged a potential high-risk scenario where gold could touch $4,500 per ounce, should global macroeconomic conditions deteriorate sharply.

As geopolitical risks escalate and economic indicators remain volatile, gold is once again cementing its position as a preferred safe-haven asset. Here’s a closer look at the five key factors driving the current surge in gold prices.

Why Are Gold Prices Rising? 5 Key Drivers Behind the Surge

Gold prices surged to fresh all-time highs this week, propelled by heightened global economic uncertainty, US-China trade tensions, rising US recession risks, weakened dollar, robust central bank amping gold reserves, and increased inflows into gold-backed Exchange-Traded Funds (ETFs).

1. Weakened U.S. Dollar Boosts Gold Demand

Gold’s latest rally is closely tied to recent weakness in the U.S. dollar, which has made the precious yellow metal more attractive to global investors. The U.S. dollar index (DXY)—which measures the greenback against a basket of major currencies—slipped below the psychological 100 mark. A “weak dollar” refers to a decline in the value of the U.S. dollar relative to other global currencies.

This decline comes amid mounting fears of a U.S. recession and heightened market volatility following aggressive tariff moves by the Trump administration. Notably, tariffs on select Chinese imports have been raised to 125%, prompting immediate retaliatory measures from Beijing. Such trade conflicts have rattled investor confidence, pushing them toward safe-haven assets like gold.

Impact on Gold Prices in India

In India, where nearly 85% of gold is imported, the gold rate is significantly influenced by movements in the U.S. dollar. 

The relationship between gold and the dollar is inversely proportional: 

• When the dollar weakens, international gold becomes more expensive in rupee terms, raising domestic gold prices.
• When the dollar strengthens, gold prices in India tend to ease

2. Central Banks Ramp Up Gold Reserves

Several Central banks have been ramping up their gold reserves amid the dollar volatility, particularly central banks in Asia. According to the World Gold Council (WGC), central banks collectively added over 1,000 tonnes of gold for the third consecutive year. The WGC’s latest Gold Demand Trends report reveals that central banks were net buyers of 1,037 tonnes of gold in 2024, marking one of the strongest years on record.

This aggressive accumulation reflects efforts by countries to diversify away from the U.S. dollar, enhance financial stability, and hedge against rising geopolitical and economic risks. This trend reflects growing concerns over a potential U.S. recession.

India’s RBI Among Top 3 Buyers

The Reserve Bank of India (RBI) made notable moves in the bullion market, adding 72.6 tonnes of gold to its reserves in 2024. This placed India behind only Poland and Turkey in net gold purchases for the year. India's total gold holdings now exceed 800 tonnes, reflecting the RBI’s continued focus on diversifying its foreign exchange reserves.

Why Are Central Banks Buying Gold? Large-scale gold buying by central banks tightens supply and also helps to diversify away from the U.S. dollar, hedge against inflation, and strengthen reserve stability amid global economic uncertainty

3. Looming Fear of US Recession

Gold prices have surged amid escalating concerns over a potential U.S. recession and the Federal Reserve's recent interest rate cuts. (Note: When interest rates fall, gold shines). Goldman Sachs has raised the probability of a U.S. recession to 45% within the next year, citing persistent economic uncertainty and trade tensions. 

Additionally, increased selling of U.S. Treasuries is signalling that even U.S. bonds may no longer be a safe haven for investors. As bond yields rise, investors turn to gold as an alternative, driving up demand and consequently gold prices.

4. Increased ETF Inflows

Amid rising geopolitical tensions and escalating gold prices, investors are flocking to gold ETFs. According to a report by ICRA Analytics, inflows into ETFs surged by 98.54% year-on-year, reaching ₹1,979.84 crore in February 2025, up from ₹997.21 crore in the same period last year. Investors are increasingly turning to Gold ETFs because they offer liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. 

5. Geopolitical Tensions and Economic Uncertainty

The U.S.-China trade war has escalated, with U.S. goods facing 125% tariffs and Chinese goods subject to 145% tariffs. This trade conflict, alongside broader geopolitical concerns—from the Middle East to Eastern Europe—is significantly contributing to global economic uncertainty.

As tensions rise, fears of a global recession intensify, prompting investors to seek refuge in gold. In times of economic instability and political unrest, gold has long been viewed as a safe-haven asset, helping to preserve wealth against potential market downturns, inflation, and currency devaluation. This growing uncertainty is adding fuel to the already surging demand for gold, pushing prices even higher.

Also read: Difference Between Repo Rate and Reverse Repo Rate

Conclusion

In summary, the surge in gold prices can be attributed to a combination of key factors: a weakened U.S. dollar, increased central bank gold reserves, growing fears of a U.S. recession, significant ETF inflows, and rising geopolitical tensions. As the global economic outlook remains uncertain, these factors have reinforced gold's position as a safe-haven asset. Investors are turning to gold not only to protect their wealth from potential market volatility but also as a hedge against the risks posed by trade conflicts, inflation, and geopolitical instability. With these factors in play, gold's rally is expected to continue, driven by both demand and the broader macroeconomic environment.

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