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.)
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.
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 gold 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:
RBI was an aggressive buyer of gold till Mar2025. They stopped buying additional gold (maybe, a strategic pause once gold crossed USD 3,000 per troy ounce in Mar2025) since the start of Apr2025. This looks like a strategic move by RBI.
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 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.
Such a decline would likely coincide with a shift in global macro conditions, but for ordinary households the cause would matter less than the outcome: a sharp erosion of perceived wealth.
I'm not speculating it would fall or plummet froms 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.
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 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 reinforces a recurring pattern in speculative cycles: gains are diffuse and celebrated, while 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.
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--in some cases, excess gold. In such a scenario, why hold more gold the required? Common people have their own things to do everyday, not speculate on gold prices.
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(the blog is not completed; i shall complete the same in the few hours; please bear with me till then)
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P.S.: Bullish argument 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 and U.S.-China trade frictions, Russia-Ukraine war, China sabre rattling in the South Pacific Ocean boost safe-haven demand, historically pushing gold 20-30% 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.
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