Gold has had a phenomenal run for the last three years. Most investors, including market analysts, were caught off guard by the continuous record highs in gold prices.
After rising more than 20% in 2023 and 2024, gold is already up over 27% so far in 2025. Gold reached its all-time high of $3,500 on April 22, and it took just under 30 months for the price to double.
Many say nothing is startling in gold’s spectacular performance. Gold is shining because the ‘world is burning’.
But, as of now, most of the geopolitical factors that contributed to the gold price surge appear to be fading away.
Yes, the impact of the Russia-Ukraine conflict or the Israel-Iran war on the world economy seems relatively calm. Also, the trade wars among nations, especially the US and China, due to Trump tariffs, are no longer threatening the world economy.
Overall, the geo-political situation seems to be all under control. However, the news is that central banks continue to buy gold, even though the overall momentum of buying may have decreased.
The impact: Gold as a safe-haven asset is losing its shine, with prices remaining in a close trading zone of around $3,350 for over two months now.
The New Trigger for Gold
Of late, the US dollar (USD) has been touted as the next big reason for the gold bull run to continue.
But, you may ask, what has the dollar got to do with gold prices? Well, the US Dollar plays a big role in determining the price of gold. Let’s break it down.
Gold has an inverse relationship with the dollar. But wait. How would the dollar’s relative strength be determined? After all, there are hundreds of currencies, just as many countries.
Here comes the importance of the dollar index, which measures the currency’s strength against a basket of six other currencies.
When the dollar index strengthens, the gold price falls, and vice versa. That’s what historical data shows.
Let’s look at a real example to know how currency weakens or strengthens. Assuming the USD-INR exchange rate today is Rs 85 to a dollar. If the exchange rate goes to Rs 90, it means the INR has weakened, USD has strengthened. Similarly, if the exchange rate goes to Rs 80, it means the INR has strengthened, USD has weakened.
Now comes the tricky part. When the dollar strengthens, investors tend to move money into dollar-denominated assets. And, not in a non-yielding asset like gold.
The reason is obvious. You want to be in a currency or asset that protects its value at the very least. A strengthening dollar does just that.
Conversely, if the dollar weakens, money makes its way out of dollar-denominated assets into gold.
And, this is what is happening now. In 2025, so far, the US dollar index has dropped almost 12% and trades at 96, a multi-year low. It’s the dollar’s sharpest fall since 1973.
Why is the US dollar falling?
So, why is the dollar index dropping? After all, the US dollar is also considered a safe-haven place to park funds and is the defacto global reserve currency. US Treasuries are held by global investors, including the central banks of Japan and China.
In 2024, the dollar index was steady around $103-$105 levels and started strengthening around the US elections in November. By the time it was clear that Trump would get a second chance to enter the White House, the dollar index reached a high of over $109.
But then, once Trump announced the reciprocal tariffs on the trading nations, it was all over for the dollar. Trade wars are expected to unleash currency wars in which the US dollar could be the biggest casualty.
There’s another action of Trump that’s leading the dollar downhill. Trump has been putting pressure on the US Fed chief Powell to cut rates aggressively. Also, new names are popping up as a replacement for Powell when he retires next year. All these tactics question the independence of the US Federal Reserve, putting pressure on the US Dollar.
That’s not all. Trump’s ‘One big, beautiful bill’ is expected to increase the US debt by over $3.9 trillion. Citing worries about growing public debt and a widening budget deficit, the US credit rating had already been downgraded by Moody’s Ratings.
Here’s how numbers stack up: In 2024, the US GDP was $28.83 trillion, much less than the $35.46 trillion of debt America carries. With a debt-to-GDP ratio of 123 percent, economists feel it is a big red flag when it comes to repayment of debt by the US.
The interest cost in servicing US debt is already huge and will increase after Trump’s tax bill. 16% of the total federal spending in fiscal year 2025 is already towards servicing the interest on US debt.
What happens if the US dollar drops?
There are a lot of implications for the US economy if the dollar index falls.
The trust that US Treasury bonds enjoyed will no longer be the same. Global investors will reduce exposure to US bonds to shield themselves from further loss. And of course, borrowings will become costly for the US government (less demand for treasuries would lead to higher interest rates). This could put additional pressure on the dollar index and pull it down further.
What happens to gold when the dollar weakens?
The US dollar’s decline provides a boost to gold prices, making dollar-denominated commodities, including precious metals, more attractive to international buyers.
You see, as explained earlier, when the US Dollar weakens, there’s a tendency of money invested in US dollar-denominated assets to move to alternate destinations. This happens as investors move to protect the value of their holdings.
When the money moves out, it ultimately needs to go somewhere else. And this is where gold comes in. The traditional store of value.
The demand for gold increases in times like these as investors prioritise the safety of capital above all else. The more the panic, the more the demand for gold. And correspondingly, the higher the prices.
Road Ahead
Overall, the dominance of the US dollar is under threat, even though it still commands a prominent position in world trade. The performance of gold will depend largely on geopolitics, trade wars, and the reliance on gold by the central banks.
Any negative fallout of these factors will impact the dollar index and subsequently gold.
The road ahead for gold, therefore, could be tricky as multiple factors are at play. Navigate the gold rally carefully.
Gold price today in India is Rs 97,220 per ten gram of 24 karat. How much time will it take to cross its all-time high level of Rs 1 lakh? Only time will tell.
Also Read: Gold gains 100% in 28 months but down 2% in last two months. Is the big rally in gold over?