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Informist, Monday, Apr. 27, 2026

 

By Abhijit Doshi

 

MUMBAI – The recent sharp rise in prices of gold has triggered a debate on whether a bubble has formed in the yellow metal. While some investors have taken a cautious view, not all are convinced. Researchers at the Reserve Bank of India have tried to seek an answer to this, as narrated in the April edition of the central bank's monthly bulletin. The researchers noted that global gold prices have risen sharply since 2024, driven by escalating geopolitical tensions, a weakening US dollar, and growing expectations of monetary policy easing across major economies.

 

Prices underwent a sharp appreciation – increasing by more than twice within a relatively short span from around $2,060 per ounce at the end of 2023 to $5,000 per ounce by February 2026, repeatedly scaled new highs on the way. During this period, gold also ranked among the best-performing assets globally.

 

However, much of the gains reversed as the West Asia conflict intensified and the dollar strengthened. In April, gold prices remained volatile, reflecting shifting expectations on policy rates amidst developments in West Asia.

 

Nevertheless, the examination of a possibility of a bubble remains important in view of its economic and financial consequences. The RBI researchers said a sharp correction in gold prices can trigger margin calls and liquidation of leveraged positions, forcing investors to sell other financial assets and imparting volatility across markets. It can also affect portfolio allocation and market sentiment, leading to broader repricing in equities, bonds, and currencies.

 

On the bubble front, all is not well. "While part of this increase reflects strong safe-haven demand and heightened uncertainty, the pace and persistence of the rise suggest the possibility of the build-up of bubble-like dynamics during 2025," the researchers said. According to them, bubbles typically feature rapid, accelerating price surges - usually referred to as explosive behaviour – followed by sharp corrections. However, the challenge is prediction of the bubble.

 

"...there is no conclusive evidence that postsurge crashes are predictable, making it difficult to distinguish irrational exuberance from rational responses to changes in fundamentals that may be latent or unobserved," the researchers said.

 

Global experts too have sought an answer to this puzzle. "... the identification of a bubble remains an open question in the academic discourse: there is no reliable evidence that price declines following strong increases are predictable, making it difficult to disentangle irrational price movements from rational market responses to the underlying (and potentially unobserved) fundamentals," the Bank for International Settlements said in a paper in December.

 

As per the RBI narration, the model involves statistical methods focussing on the timeseries properties of prices rather than directly modelling fundamentals. In particular, these methods "exploit hallmark explosiveness of bubbles, where the datagenerating process becomes nonstationary with an upward drift, producing increasingly rapid price increases."

 

However, although this approach is useful in detecting periods of exuberance, it is not a conclusive test for identifying asset price bubbles. It suggests explosive behaviour even when rapid price increases are driven by shifts in fundamentals, structural breaks, or volatility clustering. It also does not predict the precise timing of a potential reversal, they noted. The results, according to them, show that the test statistics moved above the 95% critical threshold in 2025, indicating a period of statistically significant explosive dynamics in gold prices.

 

"Overall, the evidence suggests that gold prices entered a significant phase of price escalation in 2025, consistent with bubble-like behaviour, with the sharp and persistent price surge pointing to pronounced market exuberance and a possible increase in underlying risks," the researchers said.

 

The BIS paper also underlined the importance of looking beyond data. "A typical symptom of a developing bubble is the growing influence of retail investors trying to chase price trends. At times of media hype and surging prices, retail investors can be lured to riskier assets that they would normally shun, compounded by herd-like behaviour, social interactions and fear of missing out. Indeed, measures of retail investors' interest in markets, such as internet searches, tend to surge at times of frothiness," it observed.

 

It is significant to note that the RBI has slowed down its purchase of gold in recent months. Till recently, it was actively strengthening its foreign exchange reserves by accumulating gold, with total holdings reaching a record 880.2 tonnes by late 2025. The share of gold in its total reserves of foreign exchange has gone up to 16% as on Mar. 27, from about 6% in 2020. But its buying has significantly slowed in 2025 at 4.02 tonnes compared to 72.6 tonnes in 2024, as per data by the World Gold Council. According to RBI data, it last bought just 160 kilograms, or 0.16 tonne of gold in January. Earlier this month, the Council said that RBI added a marginal 170 kg, or 0.17 tonne, of gold to its holdings in the week ended Apr. 3, taking its total reserves to 880.5 tonnes.

 

Globally too, some central banks have begun taking cautious approach to gold. Some of them have even sold part of their gold reserves in recent months. Central banks of Russia, Azarbaijan, Uzbekistan, Ghana, and Kazakhstan sold gold from their reserves in last one year for various reasons.  End

 

US$1 = INR 94.14

 

Edited by Vandana Hingorani

 

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