Articles

Gold Inflation

Written by Erina Jain

Table of Contents

Gold Inflation

Introduction

Causes

Currency devaluation concerns

Inflation and the Value of US Dollar

Central Bank Purchasing

Effects

Increase in Retail Prices

Introduction

Gold has long been seen as a representation of stability, wealth, and power. In addition to its aesthetic and industrial applications, gold is an important inflation hedge and store of value in the global economy. But in the last year, gold has outperformed stocks, bonds, and even oil to become one of the best-performing assets in international markets, offering traders and long-term investors steady double-digit returns. With prices up more than 54% so far and recently surpassing the $4,000 per ounce mark, the highest since 1979, gold is also having an incredible year in 2025. The World Gold Council states that the price increase was one of the most significant multi-year increases in decades, starting at $1,820 per ounce. This phenomenon, known as gold inflation, raises hopes, concerns, and questions. Why are prices rising, how is it impacting the economy, and what does the future hold?

Causes

Currency devaluation concerns

One of the reasons why gold prices are rising is because of the skepticism on the long-term stability of (fiat) currencies globally. Since governments keep accumulating substantial deficits, gold acts as a protective hedge for investors against potential currency devaluation. An accurate example of this is the relationship between gold and the US Dollar. While the value of US dollar keeps fluctuating due to fund flows, inflation and interest rates, gold’s value is rising steadily. Why? Because of gold’s 5000-year history as a store of value as well the deeply rooted psychological instinct of humans to seek safety during uncertain times. This is also the reason why nowadays, the demand for gold is increasing, precisely when other assets are sold in a panic. According to World Gold Council research, gold has delivered positive returns during 70% of major geopolitical events since 2000. The Ukraine-Russia conflict provided a clear example of this dynamic, with gold rising approximately 6% in the first two weeks following Russia's February 2022 invasion as investors sought protection from geopolitical risk.

Inflation and the Value of US Dollar

Gold and the U.S. dollar typically have an inverse relationship because gold is priced in U.S. dollars on global markets. When the dollar weakens (due to low interest rate), gold becomes cheaper for buyers using other currencies, which can increase demand and drive up the price, while high interest rates (contributing to strong dollar) appeals for non-dollar holders, because gold (a non-yielding asset) has a higher opportunity cost potentially lowering demand and prices. But this inverse relationship can be broken, especially during times of economic uncertainty (seen on last point) where investors look for safety, not yield when looking at gold.

Central Bank Purchasing

Central banks buy gold to maintain stability and credibility in their monetary systems and preserve national wealth against various economic risks and when they do make large purchases, their actions can drive up global gold prices by both reducing available supply and signalling confidence in gold as a strategic asset. And right now, central banks hold 20% of the gold ever mined!

However, in recent years, there has been an increase in gold purchases by central banks, particularly from emerging market economies who want to diversify their reserves away from the U.S. dollar. For example, China and other countries are diversifying away from U.S. Treasuries and into gold after Washington imposed stiff sanctions on Russia over its invasion of Ukraine in 2022, and retail investors are looking for protection against inflation. According to World Gold Council data, central banks purchased 1,136 tonnes of gold in 2022, the highest annual level since 1967, followed by 1,037 tonnes in 2023, marking the second-highest year on record. This institutional buying has provided consistent support for gold prices and reflects broader concerns about long-term currency stability among monetary authorities.

Effects

Increase in Retail Prices

The latest consequence of rising gold prices is its effect on consumers. Chinese consumers have long been lovers of gold, but record high prices are having an impact on buyers' purchasing power when it comes to shopping for jewellery or for buying for investment purposes. Since gold is becoming increasingly difficult for local retailers and consumers to buy, jewellers have to look for more affordable options, resulting in more elaborate full gold jewellery, giving way to lighter, more accessible pieces.

Investment Shifts

When gold prices rise, investors often move money out of stocks and bonds into gold, because it is seen as a safe-haven asset (see point 1, causes). Because of this shift, the liquidity of money decreases in productive markets, which means there is less money available for businesses and firms. For example, during 2024–2025, global gold ETFs (exchange-traded funds) saw inflows rise by over 15% (World Gold Council) and recorded their largest monthly inflow in September, resulting in the strongest quarter on record, while equity funds saw outflows as investors sought safety. This lack of funding from investor could decrease innovation and growth in the economy, potentially reducing its productive capacity.

Imports and Exports

Rising gold prices, affect the trade dynamics in the country, especially in gold hubs like the UAE. When gold prices rise, the cost of importing gold to the UAE increases, which leads to higher import bills. However, since the UAE exports a lot of gold products like coins, jewellery, refined gold, etc., the value of its exports also goes up, which increases the revenue in the country, benefitting the economy by improving trade balance because the country earns more.

Future Outlooks

The gold is glittering to investors now, but what does the future hold? We can’t say for sure, but there are some predictions on the increasing prices of gold in the upcoming years. Goldman Sachs has issued an optimistic outlook, raising its end-2026 target to $4,900 an ounce. This price does seem fair because gold prices have surged to over 50% so far this year, and could skyrocket 150% as early as 2028 if its current pace keeps up. Market veteran Ed Yardeni, president of Yardeni Research, stated his view on gold being a hedge against inflation as well as well as Trump’s trade war and his attempts to upend the world’s geopolitical order. “If it continues on its current path, it could reach $10,000 before the end of the decade.” However, analysts are now questioning whether this record-breaking run can continue without a pause. Many warn that the metal is entering overbought territory and could see a short-term correction before resuming its upward march. A pullback of 10%–15%, experts say, would be “healthy” for a market that has climbed so fast.

Conclusion

In conclusion, rising gold prices reflect more than just market trends. They show how strongly global economies, investors, and consumers are connected. The causes may come from inflation, uncertainty, or changing demand, but the effects reach far beyond financial charts. As gold continues to rise, we have to ask ourselves; how sustainable is this growth? Will higher prices strengthen economies or strain them? And when the next shift comes, who will truly benefit?