The price of gold has had major volatility since the U.S. closed the gold window on August 15, 1971 . On that date, President Richard Nixon unilaterally announced that the U.S. would no longer convert dollars to gold at a fixed value of $35 per ounce for foreign governments and central banks.
Previous gold price bubbles inflated and then deflated. The previous bubbles occurred after 1980 (increasing during high inflation and decreasing when inflation was brought under control and the stock market entered a bull market phase) and after 2010 (increasing during the European debt crisis and declining when that crisis was brought under control).
Currently, the price of gold is soaring in a characteristic bubble shape. The question is: Can the gold price plateau at this high point or will it deflate like other gold price bubbles before?
I asked Google Gemini several questions about the drivers of the high gold price. Much of the demand is coming from U.S. investors, China (central bank plus retail investors via ETFs) and India.
U.S.-listed gold funds attracted significant inflows in the first quarter of 2025, accounting for 133.8 tonnes, which represented 59% of global inflows.
The Reserve Bank of India (RBI) has significantly increased its gold reserves, adding 57.5 tonnes in FY25. RBI’s aggregate gold holdings reached 879.6 tonnes by March 2025. Fiscal Year 2024-25 (April 2024-March 2025): Cumulative gold imports increased by 27.27% to $58 billion, up from $45.54 billion in 2023-24. Gold is deeply woven into Indian culture. Gold jewelry is an important component of marriage ceremonies and even poor families try to have a little gold. I read about a poor Indian working woman who bought a plastic card with a tiny flake of gold embedded in it – just to have a little gold.
As of April 2025 , China’s official gold holdings stand at 2,295 tonnes , representing about 6.8% of its total official reserve assets (in value terms). Despite these official figures, many analysts and industry insiders strongly believe that China’s actual gold reserves are significantly higher than reported. Some speculate the true figure could be twice, three, or even five times what is publicly admitted. Some estimates suggest the PBoC may have secretly bought as much as 1,800 tonnes from Q3 2022 through the end of 2024, or even a total of over 5,000 tonnes by the end of 2024.
A primary driver is to diversify China’s massive foreign exchange reserves away from U.S. dollar-denominated assets, reducing reliance and exposure to potential sanctions or currency fluctuations. Increasing gold reserves can enhance the credibility and international standing of the yuan.
Given these strong reasons it’s unlikely that China will sell gold. But it’s not clear whether China will taper its purchases and what that will do to gold’s price.
Chinese market gold ETF demand surged, with total inflows of approximately RMB 31 billion (around $4.4 billion, 55 tonnes). This made 2024 the strongest year for Chinese gold ETF demand, with total AUM reaching RMB 71 billion (around $9.7 billion), soaring 150% within the year and setting a new historical high.
These unprecedented inflows are primarily driven by the attractive local gold price performance, escalating US-China trade tensions, shaky confidence in other domestic assets (like the property market and local equities), and falling local bond yields.
China has been gradually decreasing its holdings of U.S. Treasuries in recent years. Simultaneously, China has been increasing its gold reserves. This shift suggests a strategy to diversify away from the U.S. dollar and seek safer assets, potentially hedging against geopolitical and economic uncertainties.
Due to President Trump’s tariffs, trade with China is likely to decline. China’s smaller dollar trade surplus will mean lower Treasury purchases. But China will probably invest a lot of this in gold rather than Treasuries.
China’s reduction in U.S. Treasury holdings could put upward pressure on U.S. interest rates. If China significantly reduces its Treasury holdings, it could destabilize the dollar. However, selling off large amounts of treasuries would also hurt China’s remaining dollar-denominated assets. They are too smart to cut off their nose to spite their face so it’s likely that they will gradually allow their Treasuries to roll off rather than selling them.
The current gold bubble is inflated by:
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U.S. and Chinese speculators investing in ETFs. This is fungible. Investors can easily withdraw their investments, potentially deflating the bubble. It’s happened before.
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China central bank buying. This is part of their long-term strategy to bring China into dominance of the world financial system. They will continue to buy and won’t sell.
As China buys gold and not Treasuries with their trade dollars the price of Treasuries will fall. Interest rates will rise.
The desire of many investors – from the poor woman in India to U.S. investors to the Chinese – will directly impact the ability of the U.S. to support growing budget deficits.
Interest on the federal debt is already chewing up 11% of the budget. This is projected to rise in the future.
Bottom line: Demand for gold is likely to grow in the future but possibly not enough to maintain bubble prices. Interest rates will continue to rise as long as major investments are diverted toward gold and not Treasury debt.
Wendy