Economics 101 teaches us that gold is the conventional hedge against uncertainty, especially during bouts of inflation. But while inflation ravaged the world for most of the last two years, it’s now on the decline. Though it has not disappeared entirely, inflation is no longer a macroeconomic threat.
Trump has undoubtedly infused a fresh bout of uncertainty in an already fragile world. True to his electoral promise, he’s wielded his favourite stick – tariffs – in his first fortnight in office. Unlike during Trump 1.0, this time, friends and foes alike are finding themselves in the line of fire.
On the day he hosted Narendra Modi, Trump announced that the US will be imposing reciprocal tariffs to offset the disadvantage of local taxes on American exports. This move was preceded by additional tariffs on selective imports from Canada, Mexico and China. This week, he reiterated that he had told Modi in Washington, ‘Whatever you charge, I’m going to charge.’
However, the buzz is that something more than just a potential tariff war has spooked the gold markets. Particularly worrying is that the London bullion markets are running short of physical stocks to meet surging demand for gold, as mentioned above. The backlog, which used to be cleared in days, is now extending to 4-8 weeks.Bank of England stores about 4 lakh gold bars, making it the second-largest custodian of gold after the New York Federal Reserve. Majority of physical gold trading occurs in London, whereas the futures market is primarily based in New York. The normally smooth synchronous functioning between the two markets has been disrupted with supplies unable to match the surge in demand for gold.If this trend endures, the big question is whether gold is poised to explore a new level around the benchmark price of $3k per troy ounce. Or is this the beginning of a major geo-economic reset?
Traditionally, gold has had a retail appeal, with Indian and Chinese consumers topping charts in the demand for gold jewellery. According to World Gold Council (WGC), though its share has shrunk, jewellery still accounts for 52% of gold demand.
Now, there is a new player on the block: central banks. According to WGC, demand for gold from central banks topped 1,000 tonnes for a record third year in a row in 2024. While central banks have been net buyers for the last 15 years, annual average demand was 473 tonnes during 2010-21. This has doubled in the last three years.
RBI, too, is part of this gold rush. In 2024, it emerged as the second-largest buyer of gold. Ending November, on average, RBI had purchased 6.6 tonnes of gold every month. Further, it now prefers to hold its gold stocks within India, not in London. While traditional sources in demand hold strong, analysts have been piqued by the peculiar spike in gold demand emanating from New York markets.
A sinister speculation is doing the rounds that all of this is a prelude to a massive monetary reset being considered by Trump. This plan, which has acquired the moniker of ‘Mar-a-Lago Accord‘, proposes a revaluation of gold reserves held by the US ahead of a massive devaluation of the dollar. This strategy conceived by Stephen Miran, who has been tapped by Trump as the next US Council of Economic Advisers chairpersons, will be potentially disruptive to the world economic order.
A devaluation of the dollar would not only make US exports cheaper but also imports costlier. This would be devastating – especially if the US goes through with the proposal to devalue the dollar by a staggering 85% – for the Chinese economy, which is dependent on exports to America.
Experts are drawing parallels to the Bretton Woods Agreement, which allowed for coordinated devaluation of currencies by countries. It also led to the birth of IMF and World Bank. This accord also cemented US leadership of the world economy by making the dollar the reserve currency.
Though a monetary reset by the US is still in the realm of speculation, it has no doubt spooked the gold market. Given Trump’s penchant for disruption and the unthinkable, such fears are well-founded. Better safe than sorry.
The writer is an independent journalist.
