The Trajectory Of Gold Against All Odds

Nearly half of India’s annual gold demand comes from cradle rituals to weddings. Historically, it has been a hedge against crises, which could even be family-related uncertainties. This form of transferable personal security has long become a medium of intergenerational transfer. In India, for instance, household gold is estimated at 25,000 tonnes, representing 80% of the GDP and serving as a highly liquid emergency reserve.

Amid the world's growing uncertainty, this gold-based worldview has found resonance at a global level, albeit with more complexities.

Bretton Woods System Era

The early 1970s shaped the modern monetary order with the transition from the Bretton Woods system (1944–1971). It had operated through fixed but adjustable exchange rates, with the US dollar anchored to gold at $35 per ounce and other currencies to the dollar. 

Over time, the system exposed a fundamental weakness of any international monetary order built around a single national currency: there was an inevitable divergence between US domestic priorities and the stability imperatives of the global economy.

As global trade expanded, confidence in the dollar’s gold backing eroded, as the US ran balance-of-payment deficits under this rigid framework.

These mounting strains culminated in 1971, when President Richard Nixon suspended the convertibility of the dollar into gold, triggering the collapse of the Bretton Woods system and ushering in an era of market-determined exchange rates: fiat currencies.

Fiat System

Under the Fiat system, legal tender is issued by states without physical commodity backing. The monetary order was no longer anchored to gold convertibility, but was based on trust in the government and the market.

The transition to market-determined exchange rates significantly expanded the autonomy of central banks and governments in monetary policy, while simultaneously eliminating the external discipline that gold convertibility had earlier imposed on fiscal and economic excesses.

2008 Financial Crisis

However, far from diminishing gold's relevance, the fiat era reached a defining inflexion point in 2008: the global financial crisis reaffirmed gold's status as a premier crisis hedge. In the aftermath of the crisis, gold prices surged sharply, reaching $972 per ounce in 2009.

Against the backdrop of geopolitical uncertainties, sanctions risks, and concerns about the stability of fiat currencies, central banks worldwide have gradually increased the role of gold in their reserves, reflecting a deliberate diversification. Thousands of tonnes of gold have been added to reserves, bolstering long-term prices.

But gold is supplementing, not replacing, traditional reserve currencies such as the US dollar.  

In 2022, another turning point in global reserve management marked the resurgence of gold: the freezing of roughly $300 billion in Russian central bank assets.

These episodes contributed to the gradual erosion of the dominance of the dollar, while at the same time supplementing the gold’s share of global reserves, which is now estimated at 20% to 30% in value terms in recent assessments. Yet, the dollar accounts for about 60% of global reserves.

Gold As A Strategic Response

Gold’s resurgence reflects not speculation but a strategic response to the financial weaponisation of the dollar and the growing systemic risks.

Central banks typically hold US dollars as a reserve currency in the form of US Treasury securities, specifically bonds, notes, and bills. Central banks hold these reserves to facilitate international payments, stabilise exchange rates, support monetary policy, and serve as a buffer against crises. When central banks, pension funds, or sovereign wealth funds hold US Treasury securities, the US Treasury pays interest on these securities and repays the principal regularly.

While gold does not yield returns like Treasury bonds, it is retained because it is sanction-proof and cannot be monopolised by any single country. This trend underscores a cautious rebalancing towards a multipolar world rather than an abrupt overthrow of the dollar's dominance.

Gold is currently trading around $4,400 per ounce, following a remarkable 64% to 67% surge in 2025 — the most substantial annual gain since 1979. Financial institutions such as JP Morgan, Goldman Sachs, and Bank of America, along with the World Gold Council, project an average price of $4,900-$5,055 per ounce by the end of December 2026, potentially rising to $5,400 by the end of 2027.

In India, it will amount to ₹18,000 per gram, including the basic customs duty of 5% and the Agriculture Infrastructure and Development Cess (AIDC) of 1%. The current price stands at around ₹14,000 per gram.

Gold In The Time Of Uncertainty

In a wobbling geopolitical and economic landscape, societies and nation-states alike are turning to gold — not out of nostalgia, but necessity. It is, therefore, unlikely that gold prices will stabilise in the foreseeable future.

While the Government of India may be constrained by factors beyond its immediate control, there is a compelling case to reduce import duties by at least two percentage points.

(The writer is a former Ambassador. He is also an economist and the author of 'Energy Security and Economic Development in India: A Holistic Approach', which was published by TERI. Views are personal.)