The world is in transition. Gold has historically been one of the most reliable indicators of that kind of structural shift. However, the fact that it is behaving unusually right would rightfully cause one to wonder if it is relevant anymore. This report aims to answer a simple question: What drives the price of gold?
Since the Middle East went to war, a major oil supply route was under threat, and rising inflation has become a cause for concern across multiple economies, including Sri Lanka. These are conditions under which gold has historically performed well. It has not done so this time, at least not in the way many expected. Gold prices started falling a short while after the war began following which it recovered partially and has since been oscillating in a range that might seem like it lacks a clear directional movement. Is this the beginning of a longer decline in gold prices, or a temporary disruption before returning to its elevated nature, though not as strong as the rally experienced in 2025?
Given this context, Sri Lankan institutions in particular that lent at higher loan-to-value ratios during gold’s rally in 2025 are potentially at risk of any sustained downward adjustments of gold prices. This concern is greatly present in the LFC sector, where lending practices are less uniform, loan-to-value ratios have historically been higher, and the borrower base is more financially vulnerable.
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