Gold Market Analysis: Strong Price Momentum and Changing Consumer Behavior

Strong Price Momentum in Gold

The gold market has witnessed remarkable momentum in early 2025, as prices recently breached historic highs. Domestic gold prices have exhibited a significant increase, gaining approximately 13% year-to-date (y-t-d). As of mid-March, the London Bullion Market Association (LBMA) gold price averaged around USD 2,999 per ounce, marking a rise of USD 330 per ounce, or 12%, since the beginning of the year. In India, the domestic landed price has reached an all-time high of INR 88,946 for every 10 grams, influenced largely by a slight depreciation of the Indian Rupee against the Dollar.

This surge in gold prices has led to an increase in the spread between local prices and international rates, highlighting a market adjustment where local prices remain slightly discounted compared to the higher landed prices. Such dynamics have positioned gold as India’s top-performing asset, outperforming both equities, which have shown negative returns, and traditional fixed income instruments like bonds and bank deposits.

Jewelry Demand Experience Slumps Amid High Prices

Despite the robust performance of gold in investment portfolios, purchase demand in the jewelry sector has been affected significantly. The record-high prices have led to a decline in discretionary spending, particularly on jewelry, which has primarily shifted to need-based purchases such as weddings. Reports indicate that this demand slump extends across both urban and rural markets, as many consumers hold off purchasing in anticipation of a price correction or greater stability.

In a related trend, there has been a notable increase in transactions involving old gold. As prices climb, retailers have reported a surge in sales of scrap gold, with many consumers opting to exchange their older jewelry for new or lighter designs. Further, banks have seen a rise in gold-backed loans, which climbed 77% year-over-year by the end of January, as individuals leverage their existing gold assets for liquidity.

Gold Exchange-Traded Funds (ETFs) See Healthy Inflows

Gold ETFs in India have maintained a positive trajectory, registering net inflows of approximately INR 19.8 billion (around USD 227 million) in February. Although this figure is lower than the record high achieved in January, it surpasses the average inflow recorded over the previous nine months. The popularity of gold ETFs reflects broadening interest among investors seeking shelter amidst prevailing global economic uncertainties and consistently rising gold prices.

Notably, February also saw significant redemptions from these funds, totaling INR 7.8 billion (approximately USD 89.7 million)—the highest level recorded since April 2024. While this may indicate some profit-taking as prices surged, the overall participation in gold ETFs remained robust, with the number of investor accounts reaching a record 6.8 million. As of February, the cumulative assets under management for these ETFs rose to INR 55.7 billion (about USD 6.4 billion), marking a year-over-year increase of 95%.

Stability in Reserve Bank of India’s Gold Holdings

The Reserve Bank of India (RBI) has maintained its gold reserves at 879 tonnes during February, marking a deliberate pause in gold acquisitions for the second time in three months. However, the RBI has consistently increased its holdings over the past year, reflective of a strategic approach towards diversifying its foreign exchange reserves. As a result, the share of gold within total forex reserves reached an all-time high of 11.5%, indicating a growing emphasis on gold as a secure asset.

Declining Gold Imports

As prices continue to rise, gold imports have experienced a significant downturn, falling to their lowest level in 11 months. The Ministry of Commerce reported that gold imports in February amounted to USD 2.3 billion—a substantial 14% month-on-month decline and a stark 63% drop year-over-year. Estimates for the actual import volume suggest it ranged between 25 to 30 tonnes.

This decrease in imports, coupled with changing consumer behavior and increased sales of old gold, signifies a cautious market response to the elevated pricing environment. As auspicious days and seasonal festivals approach, there is speculation that these events may provide some support to gold demand in the coming months, though they may not entirely offset constraints driven by high prices.

Conclusion

As the gold market continues to evolve, various factors such as price momentum, changing consumer behavior, and shifts in demand for jewelry versus investment instruments will shape the landscape. Investors remain optimistic, but they are also adapting their strategies in light of the high prices and unpredictable market conditions. The dynamics of gold—traditionally viewed as a safe haven—continue to hold critical importance in investment portfolios during these turbulent economic times.