Gold’s Paradox: Protecting Inflation or Pushing It?

Gold is often praised as a protection against inflation, but it’s important to remember that correlation is not causation. Throughout my career, I have observed that gold offers reasonable protection against inflation. It is not a perfect hedge, but it is better than most alternatives for those who wish to protect themselves from inflation risk.

Gold also serves as a hedge against mismanagement of the economy. For generations, those who chose to shield their wealth from poor monetary or fiscal management have turned to gold as an optimal, maybe even ideal, asset. Only when the recent October data was published did I realise just how directly gold prices feed into the inflation data. October CPI inflation dipped to 0.25%, marking the lowest print in the current 2012 base CPI series and the ninth consecutive print below India’s 4% inflation target mandated for the Monetary Policy Committee. A high base last year and a sustained fall in food prices (at -3.7% yoy) dragged down the headline CPI.

Economists also track what they call Core CPI, which excludes the volatile components of fuel and food. This number, i.e., Core CPI (excluding fuel and food), edged up to 4.5% from 4.4% in September this year. But if you exclude gold prices as well and calculate a new Core CPI (excluding gold, fuel and food), then this inflation number drops to an all-time low of 2.6% yoy.

In other words, if people did not buy gold to hedge against inflation, inflation would have been lower. Interestingly, the very asset people use to protect themselves from inflation ends up nudging the inflation print higher. So, now the causation is inverted!

Against this backdrop, we have been conducting a series of events across India for our distribution partners called Younited. Suddenly, I find a burst of interest in gold among the investing class. This is the same asset often derided as barbaric. The same gold that pays no yield and has no cash flow, but has costs related to storage and protection. This is mystifying. After all, gold is an asset class that has long held a special place in India.

Indian households own 34,600 tonnes of gold (source: Morgan Stanley, WGC), which is worth approximately US$3.8tn at current prices. To put it in context, this amounts to 88.8% of India’s GDP. This implies a positive wealth effect on the household balance sheet, given the uptrend in gold prices.

These rising prices have not deterred our desire to own gold. India remains the world’s second-largest consumer of gold – accounting for about 26% of global demand – just behind China at 28%. This is a remarkable statistic because, on most metrics, India can be assumed to be on average 1/5 of China, reflecting the difference in the size of our economies. For example, in 2024, China's passenger vehicle sales were over 31 million, compared to 4.2 million in India.

Strategic allocation versus price euphoria

Just a year ago, during Dhanteras, I wrote about gold in a piece titled Gold: Never goes out of investment fashion (https://www.utimf.com/leadership-desk/gold-never-goes-out-investment-fashion).

It was not a call to buy gold because I was not smart enough to know that it would rocket sharply higher in 2025. It was merely a call to maintain exposure to gold as a strategic allocation. After the stellar performance, it is hard to feel sanguine about the asset as the risks are now more elevated. Speculation and price momentum are now likely the dominant forces. Even investors with a strategic ownership approach should follow the sound principle of rebalancing allocations into this galloping price trend. For those who don’t have exposure, I would suggest a very long-term SIP to manage the heightened risk.

In October, the demand for silver and gold was so strong that reports emerged across the world of ETFs trading at a premium to the underlying physical asset in the financial markets. This was driven by a shortage in the physical market. We experienced the same in the silver market in India and for a brief period, we halted subscriptions to the UTI Silver ETF Fund of Fund until the physical shortage eased. During this period, redemptions remained open to all investors.

The interest in gold and silver has, unfortunately, resulted in unregulated products gaining public attention. SEBI issued a caution on November 8 to the public at large about dealing in unregulated digital gold. The notice is explanatory and we encourage the public to read SEBI’s caution here: https://www.sebi.gov.in/media-and-notifications/press-releases/nov-2025/caution-to-public-regarding-dealing-in-digital-gold-_97676.html.

Investing in gold through ETFs has picked up recently in India, with ETF flows tracking at US$1.8 billion in the last 12 months, compared to US$310 million in 2023 and just US$33 million in 2022. It would appear that the rising gold price and the demand for gold as a financial asset are positively correlated. However, investors need to tread with caution, because correlation, as always, is not causation.