Gold Prices Down 25%: Can China and India Drive a Recovery?

Gold prices are caught between two powerful forces. China is accumulating more gold, and India is approaching the Dhanteras, Diwali and wedding buying season. Yet international gold is trading around $4,185 an ounce, roughly 25% below the intraday highs near $5,600 reached on January 29.

The apparent contradiction matters which is that if some of the world's biggest gold buyers are adding to their purchases, why have prices fallen so sharply? And can that demand create a foundation for a recovery?

Our assessment is that Chinese buying and Indian seasonal demand could cushion further weakness. A sustained recovery would have a stronger foundation if US interest-rate pressures ease, the dollar loses strength and investment demand can absorb selling elsewhere in the market. The decline also creates a reason to review gold's role in a portfolio, although a lower price alone does not establish that gold is undervalued.

Why Have Gold Prices Fallen About 25% From Their Peak?

The decline began from an unusually strong starting point. Global gold investment demand reached approximately 2,175 tonnes in 2025, up 84% from the previous year, according to the World Gold Council (WGC). A powerful investment wave had helped push the metal higher before the January peak.

The retreat since then has involved several episodes, with rebounds in between. Treating it as one uninterrupted collapse would miss how expectations, leverage and demand changed through the year.

January's rally met a change in monetary expectations

On January 30, the sell-off accelerated after President Donald Trump selected Kevin Warsh as his nominee to lead the Federal Reserve. The dollar rebounded, and traders reassessed monetary-policy expectations while taking profits after the sharp rally. Reuters reported spot gold down 9.5% at its afternoon reporting snapshot that day.

Gold does not pay interest. When investors expect a more restrictive monetary policy and a stronger dollar, the appeal of paying an increasingly high price for gold can weaken. Positions built on momentum are particularly vulnerable when that expectation changes abruptly.

March exposed the limits of the safe-haven argument

Gold's London benchmark fell 11.8% in March. The WGC attributed much of the decline to investors reducing leveraged positions and raising cash, with global gold ETFs losing approximately 84 tonnes during the month. Higher real yields and dollar strength contributed, but the Council identified financial-market liquidation as the main explanation for the scale of the sell-off.

This is an important lesson for investors: geopolitical stress does not guarantee an immediate gold rally. During a cash squeeze, investors may reduce an asset they can readily trade, including gold, to cover losses or lower risk across their portfolios.

September brought renewed pressure from rates and the dollar

On September 16, the Federal Reserve raised its policy-rate range by 0.25 percentage point to 3.75%-4%, stating that inflation remained elevated. That made the pressure on gold more concrete than a change in market speculation alone.

September's market data show the competing forces clearly:

Source: World Gold Council, September 2026 market commentary and ETF report, published October 7, 2026. Futures exposure is expressed in gold-equivalent tonnes; it does not represent physical bullion deliveries.

The evidence points to a market in which supportive demand is competing with expensive money, dollar strength and changes in trading positions. Strong purchases in one part of the market can coexist with a falling price.

How Much Gold Is China Buying?

China's buying story has two distinct components: its central bank is increasing official reserves, while the country is also importing substantial quantities for its broader gold market.

Official data from China's State Administration of Foreign Exchange show gold reserves rising from 76.73 million ounces at the end of August to 77.47 million ounces at the end of September. That increase of 740,000 ounces equals approximately 23 tonnes, taking reported reserves to roughly 2,410 tonnes.

September extended the People's Bank of China's purchasing streak to 23 consecutive months and represented its largest monthly addition in roughly three years.

Separately, China imported more than 1,000 tonnes of gold worth a record $158.8 billion during January-August 2026, according to customs data reported by the Financial Times and Moneycontrol. Moneycontrol reported that this exceeded the 886 tonnes imported during all of 2025.

These figures describe different parts of the market. Imports may supply investors, jewellers and inventories; they are not all central-bank purchases. Nor should imports, reserve additions and gold ETF demand simply be added together, because some gold can move through more than one of those channels.

Private investment demand continued into September. The WGC reported further inflows into Chinese gold ETFs despite weaker gold prices, with declining government-bond yields and renewed weakness in domestic equities supporting gold's relative appeal.

The implication is that China's gold demand is becoming more investment-oriented. That provides a broader source of support than jewellery purchases alone, but investment flows can change direction when prices, interest rates or competing assets become more attractive.

Central banks also have different objectives from households. Reserve diversification operates over long horizons and serves liquidity and financial-security needs. China's actions provide evidence of demand; they do not identify an ideal entry price for every retail investor.

Can India's Festive Season Support Gold Prices?

India's seasonal demand has measurable economic weight. In its January 2023 study of India's jewellery market, the WGC estimated that approximately 40-60 tonnes of gold were sold around Diwali and Akshaya Tritiya combined. It also estimated that bridal jewellery represented 50%-55% of the gold jewellery market. These are historical structural estimates, rather than a forecast for Dhanteras 2026.

More recent evidence confirms that these occasions can lift purchases. The WGC's 2025 report found that festival and wedding demand increased Indian jewellery purchases in the fourth quarter compared with the preceding quarter. However, full-year jewellery demand still fell 24% to 430.5 tonnes as high prices constrained affordability.

That distinction is central to this year's outlook. Families may continue with planned purchases while choosing lighter pieces, exchanging existing jewellery or keeping their spending within a fixed budget. Strong sales in rupees can therefore coexist with fewer tonnes purchased.

The WGC's September 17, 2026 India update reported resilient wedding-related buying and steady physical investment demand. It expected demand to improve as the festive and wedding season progressed, while warning that elevated prices and volatility could restrain discretionary purchases.

However, local prices were trading approximately $78 an ounce below import parity as of September 11. That discount indicated adequate domestic supply relative to demand at the time, partly supported by exchanges of old jewellery.

If seasonal purchases first absorb existing stocks, their immediate effect may be to narrow domestic discounts. A stronger international effect would require sufficient demand to generate additional imports and replenishment.

Festivals also appear on the calendar every year. Their existence is already known to traders. The more consequential development would be actual purchases exceeding expectations, particularly in tonnes, while global investment conditions become more favourable.

Can Chinese and Indian Demand Create a Base for Gold?

They could help gold prices stabilise, but the available evidence does not establish a guaranteed floor. September is the clearest test: gold ETFs accumulated substantial holdings while the benchmark price fell sharply.

Gold pricing reflects several interacting markets. Jewellery and bullion purchases affect physical demand, while ETFs, futures and over-the-counter transactions influence investment exposure and price discovery. Futures positions can change without an equivalent shipment of physical gold, so comparing tonnage figures across these markets requires care.

The broader official sector provides another source of demand. The WGC estimated that central banks purchased approximately 289 tonnes in the second quarter of 2026. Yet global gold ETFs recorded net outflows of about 45 tonnes over the same quarter. Different investor groups can therefore move in opposite directions.

Chinese accumulation and Indian seasonal demand could make the market more resilient by absorbing available supply. Establishing a durable base would require evidence that selling pressure is fading and that buyers remain active through further volatility.

Useful confirmation would include firmer physical premiums, stronger replenishment and import demand, sustained ETF accumulation, and prices stabilising across several weeks. A brief rebound following one headline would provide much less evidence of a lasting change.

What Catalysts Would Help Gold Prices Recover Sustainably?

The strongest recovery case would combine persistent demand with a reduction in the forces currently pushing against it. It would not require every indicator to turn positive simultaneously, but several reinforcing changes would improve the foundation.

Real yields deserve particular attention. They reflect bond returns after accounting for inflation expectations. Gold can face pressure when those returns rise; simply seeing a lower headline inflation reading or hearing discussion of a Fed rate reduction does not establish that the pressure has eased.

Energy prices are another catalyst with effects in both directions. Geopolitical disruption can increase demand for protection, but an oil-driven inflation shock can also raise interest-rate expectations and strengthen the dollar. The balance between those responses matters more than the existence of geopolitical tension alone.

There is also a route to recovery through concern about government finances. The WGC's September commentary highlighted unusually persistent UK gold ETF demand and examined whether fiscal concerns were influencing allocations. Its findings were tentative, but they underline why rising nominal bond yields are not automatically negative for gold in every environment.

Conversely, a stronger dollar, persistently high real yields, renewed futures liquidation or weakening investment demand would undermine the recovery case. Seasonal jewellery purchases could still occur in that environment without reversing the wider price trend.

How Should Investors Evaluate Gold Allocation After the Correction?

Gold deserves consideration as a measured portfolio diversifier after the pullback, particularly where existing exposure is limited and the investment horizon allows for volatility. The case becomes less convincing when the objective is a quick return to January's record or when gold already represents a large share of household wealth.

Gold can complement equities and bonds because its demand drivers differ. However, it generates no regular income, and its price can experience substantial losses. The WGC's strategic-asset research makes both the diversification case and the volatility limitation clear.

A lower price improves the entry level relative to January. It does not produce the same valuation evidence as a company's earnings, cash flows or balance sheet. The previous high provides a comparison point; it is not proof of fair value.

A practical evaluation starts with four decisions:

1. Define the purpose. Establish whether gold is intended to diversify equity exposure, provide a store of value or meet a future physical-gold requirement. Each purpose changes the appropriate instrument and horizon.
2. Count existing exposure. Include financial gold and economically meaningful physical holdings when assessing concentration. Jewellery reserved for family use may contribute to household wealth while being less available for portfolio rebalancing.
3. Set the size before judging the next price move. A predefined allocation makes the decision less dependent on identifying the exact bottom. Phased contributions can spread entry dates, although they cannot prevent losses if gold keeps declining.
4. Check liquidity and costs. Compare how closely a product tracks gold, its ongoing expenses and the conditions for entering or exiting it. Emergency money and near-term commitments need a separate liquidity assessment.

For example, consider a ₹10 lakh portfolio with an illustrative 10% allocation to gold. If that gold exposure falls another 20% while everything else remains unchanged, the portfolio loses ₹20,000, or 2%. If gold rises 20% under the same assumption, it contributes 2% to the portfolio's gain. The 10% weight is used to demonstrate sizing, not prescribe an allocation.

Our assessment is that the correction makes a review of strategic gold exposure more reasonable than it was at January's extreme prices. Chinese buying and India's festive season strengthen the demand argument, while US rates, the dollar and investment positioning remain critical to the recovery.

A portfolio allocation should be able to tolerate an incomplete recovery and further volatility. An investment thesis that needs Diwali demand to send gold immediately back to its record has a much weaker foundation.