Global Gold Demand Rises Amid Trade Tensions

Recent developments in international trade have seen increase in gold demand. The announcement of a 25% tariff on steel and aluminium imports by the United States has triggered a flight to safety among investors. Central banks are increasingly turning to gold as a reliable asset amidst rising global uncertainties. This trend has been particularly pronounced since the Covid-19 pandemic, with central banks accumulating gold at unprecedented rates.

Gold as a Safe-Haven Asset

Gold is historically viewed as a safe-haven asset. Investors flock to gold during times of economic instability. It provides protection against inflation and currency fluctuations. Its liquidity and intrinsic value make it a preferred choice for central banks. The World Gold Council reported that global gold demand reached record levels in 2024, with contributions from central bank purchases.

Central Bank Accumulation Trends

Central banks have been major players in the gold market. In 2024, central banks acquired over 1,000 tonnes of gold for the third consecutive year. This trend reflects a shift in reserve management strategies. Emerging market central banks, particularly in India and China, have been diversifying their foreign reserves by increasing gold holdings. This diversification aims to mitigate risks associated with currency fluctuations and geopolitical tensions.

Impact of Tariffs on Global Trade

The imposition of tariffs by the US has implications for global trade dynamics. Countries like India, which have substantial trade relationships with the US, face potential challenges. The tariffs could lead to retaliatory measures, affecting exports. India’s metal sector is particularly vulnerable, as it may encounter increased competition from redirected supplies from China and South Korea.

India’s Gold Reserve Strategy

The Reserve Bank of India (RBI) has been actively accumulating gold since 2017. This strategy is part of a broader effort to manage foreign exchange reserves effectively. As of early 2025, India’s gold reserves have increased. This accumulation is not solely a response to geopolitical events but also a means of ensuring a balanced reserve portfolio.

Global Trends in Gold Reserves

Globally, central banks have been increasing their gold reserves. The proportion of gold in total reserves has risen from 6% in 2006 to 11% in 2024. This trend indicates a renewed confidence in gold as a financial asset. Countries like Turkey and Poland have also been aggressive in their gold accumulation, denoting a shift in global reserve strategies.

Market Reactions and Future Outlook

The market’s reaction to the ongoing trade tensions and central bank actions suggests a potential “golden era” for the precious metal. As uncertainties persist, gold may continue to attract investment. The interplay between trade policies and gold demand will be crucial in shaping future market dynamics.

Questions for UPSC:

1. Critically discuss the implications of rising global gold demand for emerging economies.
2. Examine the role of central banks in stabilising financial markets during economic downturns.
3. Analyse the impact of US trade policies on global trade relationships and economic stability.
4. Estimate the potential consequences of increased gold accumulation by central banks on international financial systems.

Answer Hints:

1. Critically discuss the implications of rising global gold demand for emerging economies.

1. Emerging economies may benefit from increased gold exports, boosting foreign exchange reserves.
2. Higher gold demand can lead to price stability, providing a hedge against inflation for these economies.
3. Central banks in emerging markets may diversify reserves, reducing dependence on volatile currencies.
4. Increased gold accumulation can attract foreign investments, enhancing economic growth potential.
5. However, reliance on gold may expose these economies to global market fluctuations and price volatility.

2. Examine the role of central banks in stabilising financial markets during economic downturns.

1. Central banks act as lenders of last resort, providing liquidity to prevent market collapse.
2. They adjust interest rates to influence borrowing and spending, stabilising economic activity.
3. Through asset purchases, including gold, they can boost investor confidence and stabilize currencies.
4. Central banks implement quantitative easing to inject money into the economy during downturns.
5. They also monitor financial systems to mitigate systemic risks and maintain economic stability.

3. Analyse the impact of US trade policies on global trade relationships and economic stability.

1. US tariffs can lead to retaliatory measures from affected countries, escalating trade tensions.
2. Such policies may disrupt established supply chains, causing economic uncertainty globally.
3. Emerging markets with strong ties to the US may face export challenges and economic slowdowns.
4. Trade policies can influence currency values, affecting international investment and trade balances.
5. Long-term, US trade policies may push countries to seek alternative trade partners, reshaping global alliances.

4. Estimate the potential consequences of increased gold accumulation by central banks on international financial systems.

1. Increased gold holdings can enhance the stability of central banks’ reserve portfolios, reducing currency risk.
2. Gold accumulation may lead to higher global prices, impacting inflation rates and investment strategies.
3. A shift towards gold could undermine confidence in fiat currencies, prompting a reevaluation of monetary policy.
4. Central banks’ gold purchases can create demand pressure, affecting market dynamics and investment flows.
5. This trend may encourage other nations to increase gold reserves, altering the balance of global financial power.