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The recent surge in gold prices, breaching the significant psychological barrier of ₹1 lakh per 10 grams in the Indian retail market and reaching a new all-time high on the Multi Commodity Exchange (MCX), reflects a complex interplay of geopolitical tensions, economic uncertainties, and shifting investor sentiment. This dramatic rally, occurring ahead of Akshaya Tritiya, a traditionally auspicious day for gold purchases in India, underscores the precious metal's enduring appeal as a safe-haven asset in times of turmoil. Several key factors have contributed to this surge, including escalating geopolitical tensions, a weakening US dollar, growing fears of a recession in the United States, increasing inflows into gold exchange-traded funds (ETFs), and strategic accumulation of gold reserves by central banks globally. Understanding these drivers is crucial for investors seeking to navigate the volatile landscape of the gold market and make informed decisions. The intensification of geopolitical tensions, particularly the U.S.-China trade war, has significantly heightened global economic uncertainty. The imposition of tariffs on goods traded between the two economic superpowers, coupled with broader geopolitical instability in regions such as the Middle East and Eastern Europe, has fueled concerns about a potential global recession. In such an environment, investors often flock to gold as a safe-haven asset, seeking protection against market volatility, inflation, and currency depreciation. Historically, gold has served as a store of value during periods of economic and political instability, offering a hedge against the erosion of purchasing power. The weakening of the US dollar has further propelled the gold rally. A decline in the dollar's value relative to other major currencies makes gold more attractive to investors holding those currencies, increasing demand and driving up prices. Concerns about a potential recession in the United States, exacerbated by aggressive tariff policies, have contributed to the dollar's weakness. As the Federal Reserve contemplates cutting interest rates in response to economic headwinds, the appeal of dollar-denominated assets diminishes, further bolstering the case for gold as an alternative investment. Moreover, growing fears of a recession in the United States, as highlighted by Goldman Sachs' increased probability estimate, have prompted investors to re-evaluate their asset allocation strategies. The rise in the selling of U.S. Treasuries suggests that even government bonds are losing their safe-haven status, as investors seek more reliable stores of value. Gold, with its inherent stability and lack of correlation with other asset classes, has emerged as a preferred option in this environment, driving demand and pushing prices higher. The increasing popularity of gold ETFs has also contributed to the recent surge in gold prices. These investment vehicles offer investors a convenient and cost-effective way to gain exposure to gold without physically holding the metal. The significant year-on-year surge in ETF inflows, as reported by ICRA Analytics, reflects the growing investor interest in gold as a strategic asset. The liquidity, transparency, and ease of trading associated with gold ETFs make them an attractive alternative to physical gold, particularly for retail investors and smaller institutional players. Finally, the strategic accumulation of gold reserves by central banks around the world underscores the metal's enduring importance in the global financial system. In recent years, many central banks, particularly in Asia, have been steadily increasing their gold holdings as part of a broader effort to diversify their reserves and reduce their reliance on the US dollar. This trend reflects a growing recognition of gold's role as a store of value and a hedge against geopolitical and economic risks. The World Gold Council's data on central bank gold purchases provides further evidence of this strategic shift, highlighting the significant role that central bank demand plays in supporting gold prices. In conclusion, the recent surge in gold prices to record highs is driven by a confluence of factors, including geopolitical tensions, a weakening US dollar, recession fears, ETF inflows, and central bank buying. These factors collectively create a favorable environment for gold, reinforcing its status as a safe-haven asset and a hedge against economic uncertainty. While the gold market may experience periods of volatility, the underlying drivers of demand suggest that gold will continue to play an important role in the global financial system for the foreseeable future.
Manav Modi, Senior Analyst, Commodity Research at Motilal Oswal Financial Services Ltd., provides further insight into the dynamics of the gold market, noting that gold has posted gains of over 20% and reached all-time highs on both MCX and COMEX. He acknowledges that gold's pace and volatility this year have surprised the market, exceeding expectations for most asset classes. Modi suggests that volatility is likely to persist in the gold market throughout the year. He advises risky traders to consider riding the rally, while cautioning safe traders to await dips before accumulating gold for potentially higher targets. He maintains a “Buying on Dips” strategy, projecting that gold could reach $3350-3500 and consolidate around that level. However, he also acknowledges the possibility of a rally towards $3700 in the long term, given the current momentum. Assuming a USDINR exchange rate of 85, he estimates an immediate range of ₹ 96500- 1,00,000 on the domestic front, with a potential longer-term target of ₹1,06,000. These projections highlight the potential upside for gold investors, while also emphasizing the importance of managing risk in a volatile market. The interplay between global and domestic factors, as well as the differing risk appetites of traders, will likely shape the trajectory of gold prices in the coming months.
The article details five reasons for the rally. Firstly, Geopolitical tensions and uncertainties are playing a major role, with the U.S.-China trade war escalating and wider geopolitical tensions rising. Concerns over a potential global recession are growing, leading investors to flock to gold as a safe haven asset. Secondly, a weakened US dollar is a significant driver, enhancing gold's appeal among global investors. The U.S. dollar index (DXY) has fallen below the key 100 level due to concerns over a potential U.S. recession and increased market turbulence. Thirdly, fear of a recession in the US is pushing gold prices higher as the Federal Reserve is expected to cut interest rates. Goldman Sachs has increased the chances of a U.S. recession to 45% over the next year. Fourthly, increased ETF inflows are contributing to the rally, driven by geopolitical tensions and rising gold prices. ICRA Analytics highlights a significant 98.54% year-on-year surge in ETF inflows in February 2025. Finally, central banks are increasing gold reserves amid dollar volatility, reducing reliance on the U.S. dollar and safeguarding against economic uncertainties. The World Gold Council (WGC) reports that central banks collectively purchased over 1,000 tonnes of gold in 2024.
Source: Gold price hits ₹1 lakh mark: Here are 5 key reasons behind the rally in yellow metal