Why should the US central bank or the Federal Reserve and its interest rates affect gold prices in India? Gold has a market capitalization of 25 Trillion dollars as of today. This is the price of gold multiplied by all the gold that has been dug up and refined in this world throughout centuries.
We had written earlier here on how gold became the defacto money across various empires and how paper money replaced gold as currency across the world. Initially all the paper money issued by kings or governments were supposed to be backed by gold. The US dollar became the currency of trade after the second world war amongst countries as people believed in the US government and its ability to pay off its debts and also because US protected trade across the world and opened its markets for most participants after the Second World War.
The End of the Gold Standard
The United States went off the gold standard in stages, first ending domestic convertibility in 1933 under President Franklin D. Roosevelt, and then ending international convertibility in 1971 under President Richard Nixon, effectively ending the gold standard. Under the Bretton Woods system established after World War II, foreign central banks could exchange U.S. dollars for gold at a fixed price. On August 15, 1971, President Nixon unilaterally suspended the direct convertibility of the U.S. dollar to gold, a move known as the “Nixon Shock”. This action made the U.S. dollar a fiat currency and effectively ended the gold standard system, leading to a floating exchange rate regime for global currencies by 1973.
Below is the price of gold after the Nixon Shock and Oil Embargo of the 70s
Gold prices shot up from 30$ an ounce to 800$ by 1980. The Vietnam war, welfare systems and other government spending made it impossible for the US government to pay off debts and hence they printed more of the fiat paper dollar without the backing of gold and gold prices shot up through the roof.
The Inverse Relationship: Why Interest Rates Move Gold
Gold prices rise when interest rates fall and governments increase the money supply because lower rates reduce the opportunity cost of holding gold, and a larger money supply (often from printing money or stimulus) can lead to inflation and a weaker dollar, both of which make gold a more attractive safe-haven asset for preserving wealth. Investors move away from low-yielding assets and seek to protect their money from a potential loss in purchasing power, making gold’s value more appealing. Gold trades in the international market and its prices across the world has to be the same or there will be arbitrage opportunity and hence gold prices in India goes up across the world when the US govt cuts interest rates.
The US Federal Reserve primarily sets the target range for the federal funds rate, which was 4.00% to 4.25% as of September 18, 2025, following a recent rate cut. The Fed also sets the discount rate, which is the rate at which commercial banks can borrow money directly from the Fed. These rates are set by the Federal Open Market Committee (FOMC) and the Board of Governors, respectively, to influence the cost of money and economic activity.
Federal Funds rate is the main policy interest rate, which is the rate at which banks lend reserve balances to other banks overnight on an uncollateralized basis. The FOMC determines the target range for this rate to influence monetary policy. Discount Rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility. The Board of Governors sets the discount rate. The federal funds rate is the Fed’s most important tool for influencing the broader economy. Changes in the federal funds rate affect short-term borrowing costs throughout the economy, impacting everything from mortgage rates to interest earned on savings accounts. The discount rate serves as a backstop liquidity tool for banks.
The interest paid on debt by the US government is close to a trillion dollars. The current budget deficit per year is close to 2 trillion. The national US debt is close to 40 Trillion dollars. Any president wants a lower interest rates to reduce the deficit. Lower interest rates risks inflationary pressures. Inflation is taxes that are silent and that is a major risk also. In fact one factor contributing to Joe Biden’s loss to trump is inflationary prices due to excess money printed in 2021. When interest rates are lowered investors expect inflation and asset prices to go up.
The Government’s Dilemma: Debt, Deficits, and the Dollar
A government has expenses and income be it the US government or Indian government or Russian government. Taxes are the main income for any government. Expenses include welfare programs like social security and medical care, defense and interest on debt. When expenses are more than income governments borrow from corporates to individual to foreign investors by the issue of bonds to fund those current expenses. Over time this dent increases and interest on this debt becomes greater than the welfare and defense programs. Investors still lend governments money because they know governments can tax people in the future and pay it off.
The US government can print money and pay its debts off even though it is not a good idea as it will cause massive inflation. Most other governments when they borrow money, they have to pay it off in US dollars and not in their local currency. This is one of the reasons why they hold reserves or investments in gold and US treasury bonds.
M2 money supply is a broad measure of the money supply in an economy that includes all of the components of M1 (currency in circulation and demand deposits) plus savings accounts, small-denomination time deposits, and retail money market funds. It represents not only easily spendable money but also “less liquid” money, or money that takes a bit more effort to convert into cash for immediate use. The Federal Reserve uses M2 to monitor the economy’s liquidity and to inform its monetary policy decisions, as growth in the M2 money supply can influence inflation.
Every time M2 increases, gold prices increase in history. When interest rates are low, US pays less in interest rates but money prtinting brngs in high chance of inflation. When interest rates are high and less printing of money happens gold prices go down.
A New World Order? Central Banks Pivot to Gold
The US government holds the largest gold reserves among governments at approximately 8,000 tons. The next is Germany at 3,300 tons. The Indian government has roughly 850 tons. The central banks do this buying of gold usually. As of 2025 for the first time since 1996 central banks collectively all over the world are holding more gold than US treasury bonds. Central banks buy US Treasuries for liquidity, stability, and their role as the world’s reserve currency, while gold is bought as a long-term store of value, an inflation hedge, and a strategic asset to mitigate currency risk and geopolitical uncertainty. Both assets are considered high-quality, reliable reserve assets that help central banks manage financial stability and diversify their holdings beyond single-currency dependence.
The US dollar has been depreciating at an alarming pace compared to the dollar in the last 5 years. Gold prices per ounce was 1,500$ in 2019 and right now it is close to 4,000$. It makes sense for central banks to buy more gold and sell US treasuries.
Russian and Chinese banks have been offloading US Treasuries and buying more gold specially since the confiscation of Russian assets and US government weaponizing Swift and Wire transfers in the aftermath of Ukraine invasion. Money works on trust. When the US government weaponized the dollar and payments systems against Russia, trust has taken a major set back and all countries allies and foes need to keep reserves in gold and US treasuries.
Holding reserves all in gold has a risk too. Imagine the federal reserve makes short term interest rates 20%, gold can crash at an astronomical pace. Too see something similar just have to look into gold prices graph in the 1980s. It crashed from around 700$ peak in 1980 to 200$ by 1986 and stayed below the peak of 800$ for 20 years. Now imagine these central bankers have to pay their debt back in dollars. This is where the risk of holding gold from history lesson shows us.
Nithin Eapen is a technologist and entrepreneur with a deep passion for finance, cryptocurrencies, prediction markets and technology. You can write to him at neapen@gmail.com
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