Central Banks Fuel Gold Speculation, Risking Pain for Ordinary People 23Dec2025
(The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
(Don't miss the Bonus Section and Bullish Arguments at the end of the article)
Tangible assets gold and silver have worked, for many Indian savers, as a natural hedge against gradual rupee depreciation. At least, I've analysed 25-year data to check this assertion; my analysis reinforces the theory of gold working as a natural hedge.
India’s gold prices are supported by two key forces:
1) the gradual depreciation of the rupee over long periods, and
2) the long-term upward trend in global gold prices, even though they may remain stagnant or volatile for years at a time.
Together, these factors have helped gold retain purchasing power for Indian savers across economic cycles. As a result, much of gold’s return in India reflects currency protection and long-term value preservation rather than consistent year-to-year gains.
Can we Indians depend on gold and silver as a natural hedge in future too? I am not sure. When I say future, I mean in the next five, 10 or 15 years.
The relentless rise in world gold price (in US dollars) in the past two years is basically a central bank trade. Central banks have been loading up on gold considering it as a "safe haven" asset and a prudent reserve diversification.
They also see gold as a hedge against geopolitical and monetary uncertainty.
Central banks, especially, in India, China, Japan and Turkey have been adding more gold to their holdings (as part of their forex reserves) in recent years.
Counterpoint To The Current Gold Price Surge Narrative
However, this view overlooks an important social and economic consequence: Central banks may be doing a disservice to their own populations by actively reinforcing a speculative frenzy in gold and, indirectly, in silver and other metals.
Central Banks As Boosters Of Speculation
When central banks aggressively accumulate gold at record prices, they send a powerful signal to markets and households alike. Regardless of official intent, such actions are interpreted by the public as validation that gold prices will continue rising.
In gold-sensitive economies, this legitimises speculative behavior among retail investors and ordinary savers. Central banks thus become catalysts of speculation rather than neutral stabilisers, even if unintentionally.
However, it's worth noting India's central bank, Reserve Bank of India (RBI) stopped adding gold to its reserves in Apr2025.
The 2025 Shift: From Aggressive Buyer to Strategic Holder:
The RBI was an aggressive buyer of gold until Mar2025. Since Apr2025, it has paused fresh purchases—possibly a strategic decision after gold crossed USD 3,000 per troy ounce. The move appears deliberate rather than coincidental.
We need to see how other Asian central banks respond to the recent surge in world gold prices. If they stop adding further, will gold price fall or go sideways or the speculators continue to take it to new highs? I don't know the answer.
Historical Lesson: Speculative Surges Hurt Ordinary People Most
History consistently shows that speculative booms—whether in equities, real estate, commodities or precious metals—do not end well for ordinary citizens. Middle-class and lower-middle-class households tend to enter late in the cycle, allocate disproportionately to the rising asset avoiding diversification.
When the cycle turns, losses are concentrated among these groups, while large institutions and policymakers remain relatively insulated.
Manias, Panics and Crashes
The Tulip Mania in 1637 saw prices collapse 99 per cent after irrational exuberance, wiping out speculators but leaving the economy intact as it was a narrow asset frenzy.
The dotcom bubble burst in 2000 erased trillions of dollars in tech valuations, devastating late entrants like ordinary retail investors while savvy institutions recovered faster.
Even the 1970s commodities boom ended in a sharp reversal amid supply gluts, reminding that commodity manias punish the masses chasing peaks without fundamentals.
Gold's 1980-1983 freefall from USD 850 to nearly USD 300 echoed this, as Federal Reserve Chair Volcker's rate hikes in the US crushed speculation—yet gold later rebounded over decades, unlike one-off fads.
Gold As A Social Asset, Not Just A Financial One
In many Asian societies, gold is not merely an investment but a cultural and financial anchor for household savings. Middle- and lower-middle-class families hold gold as a perceived safe store of value, often accumulated over years or generations.
When central banks fuel a price surge, they implicitly encourage households to commit savings at inflated prices, increasing their vulnerability to a correction.
Why Central Bank Participation Is Economically Problematic
From an overall economic viewpoint, it is problematic for central banks—institutions tasked with financial stability—to be seen adding momentum to speculative excesses. Even if gold has long-term strategic value, buying aggressively at extreme prices undermines the stabilising role central banks are meant to play.
It blurs the line between reserve management and market distortion, especially when the social costs of a downturn are borne by citizens rather than by the institutions themselves.
Hypothetical Scenario: Gold Falls From 4500 To 2500 In Two Years
If gold prices were to fall from the current USD 4,500 to USD 2,500 per troy ounce, say, within the next two years, the nominal loss would be severe and highly visible.
Even if the drop in gold price is caused by complex global events, for most households, the reason hardly matters — what matters is feeling poorer as the value of their gold holdings falls.
I'm not speculating it would fall or plummet from its USD-4,500-peak in the next one or two years. I'm just expressing my concerns about the social and financial impact of any such crash on common people.
Scenario analysis: What factors could cause gold to drop from its current level of USD 4,500 per troy ounce to, say, around USD 2,500 within the next two years?
> A sustained strengthening of the US dollar, driven by higher interest rates or strong economic growth, could reduce demand for gold as a safe-haven asset.
> Central banks around the world, especially major holders like the US, European nations and China, could start aggressively selling portions of their gold reserves, increasing supply in the market
> A significant drop in geopolitical tensions, like, US-China trade tensions or Russia-Ukraine war or financial market uncertainty might weaken gold’s appeal as a hedge against risk
> Rapid adoption of alternative stores of value, such as digital assets or high-yield bonds, could divert investment away from gold
> A global economic recovery with rising real interest rates could make yield-bearing assets more attractive than non-yielding gold, pushing prices lower
> Gold returned nearly 70 per cent this year in dollar terms, and such a steep rise could temper further gains in 2026, as global investors reassess their investment plans at the start of the new year; any momentum trade has its own downside risk.
Social Impact On Common People
For common people, especially in the middle- and lower-middle classes, the impact would be immediate and psychological as well as financial. Households would feel poorer, even if losses remain unrealised.
Negative wealth effect: Consumption would slow as families become cautious, postpone discretionary spending and rebuild savings. Gold-backed borrowing would become more constrained as collateral values fall, tightening access to liquidity for household emergencies and small businesses.
Inequality Of Outcomes
The losses from a gold correction, if any, would not be evenly distributed. Wealthier investors and institutions are typically diversified and able to absorb volatility or rotate into other assets.
Ordinary citizens, whose savings are often concentrated in gold, would bear a disproportionate share of the pain. This reflects a familiar pattern in speculative cycles: gains are widely celebrated, but losses are concentrated and socially damaging.
Final Assessment
All speculative manias end badly, even when driven by legitimate macro concerns. By aggressively buying gold at elevated prices, central banks risk boosting a speculative cycle whose eventual unwinding will harm the very populations they are meant to protect.
History shows that even brilliant minds are not immune to such follies: Isaac Newton, one of the greatest scientists of all time, famously lost a fortune in the South Sea Bubble, proving rational thinking often fails in the heat of a speculative mania and greed.
From a broader economic and social stability perspective, central banks should be cautious not only about what they buy, but about the signals they send—because when the cycle turns, ordinary people pay the price.
Author's personal view: I'm not a great fan of gold. You may say I've missed the rally in gold in the past two years. That's okay. 😄 Most of the Indians hold some gold already (34,600 tonnes as per reports)--in some cases, excess gold. In such a scenario, why hold more gold than required? Common people have their own things to do everyday, not speculate on gold prices.
Gold doesn’t generate regular income
Jewellery has making charges and resale losses
Price volatility can create false comfort during rallies
Too much gold means less exposure to productive assets like equity, business or skill development
Gold exposure should ideally be limited to 5 to 8 per cent of one's total net worth, excluding essential personal jewellery that Indians customarily wear. Anything beyond this level, in my opinion, constitutes excess allocation and does little to improve long-term financial outcomes.
Final word from the Oracle of Omaha: Warren Buffett famously remarked that gold has no real utility, as it does not generate income, produce goods or contribute to productive economic activity — a reminder that while gold may shine, it does not work for you the way productive assets do.
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Bonus Section
There are some investment investment options accessible to middle-class and upper-middle-class Indian investors that can help protect against a combination of rupee depreciation and persistent inflation, which are the hallmarks of Indian economy.
Here they are (not necessarily in this order):
Equity mutual funds in India offer broad market exposure and have historically outpaced inflation, helping savers preserve purchasing power despite rupee depreciation (caveat: active equity funds have their own set of issues).
National Pension Scheme or NPS with a majority equity portion allows salaried and self-employed investors to build long-term retirement wealth that can grow faster than inflation while benefiting from tax incentives.
Direct stocks, for savvy investors, provide the potential for high returns and dividends that can help protect the harmful effects of persistent inflation and currency weakening.
Gold has traditionally served as a hedge against rupee depreciation and inflation, though its future effectiveness may be uncertain with gold prices at historic levels.
Real estate, depending on location, with reasonable rental yields allows owners to adjust rents with inflation, offering both income and capital appreciation as a hedge against currency and price pressures.
Mutual funds in India with exposure to foreign stocks provide diversification and potential protection against domestic currency depreciation.
Direct global stocks give investors (restricted) access to economies outside India, helping shield wealth from rupee depreciation and inflation in the local market.
Listed REITs or real estate investment trusts offer exposure to real estate income streams without large capital outlay, helping protect against inflation while remaining liquid. But the REITs asset class in India lacks options for potential investors.
Direct foreign stocks or foreign equity ETFs or exchange trade funds allow investors to hedge against domestic currency loss and benefit from growth in stronger or stable foreign economies.
Key takeaway for middle-class investors:
A diversified mix—some domestic equity exposure (direct or via mutual funds), NPS and a small allocation to REITs or foreign assets—offers a reasonable hedge against both persistent inflation and rupee depreciation without taking excessive risk. Happy Investing!😁
P.S.: Bullish arguments for gold by experts (including those with vested interests):
Central Bank Demand: Banks like China and India continue stockpiling gold as reserves, with recent surges acting as "boosters" that stabilise and lift prices amid fiat currency concerns.
Inflation Hedge: Persistent inflation and loose monetary policies make gold a premier store of value, drawing retail and institutional buyers during economic volatility.
Geopolitical Tensions: Ongoing conflicts, the US-China trade frictions, Russia-Ukraine war and China sabre rattling in the South Pacific Ocean boost safe haven demand, historically pushing gold 20 to 30 per cent higher in such periods.
Technical Momentum: Gold's 50-day and 200-day moving averages trend upward (around USD 4,150 and USD 3,560 respectively), with year lows at USD 2,600 signaling room for new highs toward USD 5,000.
Supply Constraints: Mining output lags demand growth, with limited new discoveries ensuring scarcity-driven price support over 2026-2027.
