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Gold prices are falling during war. It’s a clear sign that real economic shock is coming

Although economic growth has decelerated, it hasn't collapsed, leading markets to prematurely conclude that global economy has withstood the shock. This conclusion is premature.

Gold prices are declining at a time when an increase would be expected. Typically, geopolitical tensions such as the conflict in the Middle East, disruptions in oil supply, and escalating geopolitical uncertainties would drive investors towards safe-haven assets like gold.

However, the current softening in gold prices is not contradictory; rather, it is a clue. It implies that market reactions are no longer predominantly driven by fear but are instead influenced by liquidity dynamics—specifically, the availability of cash, the demand for it, and the adjustments occurring in balance sheets under pressure.

When gold fails to function as a traditional safe haven, it often signifies a more profound underlying shift. This shift pertains to the global economy’s delayed absorption of the impact of elevated interest rates.

Over the past two years, economic debate has focused on inflation and central bank monetary tightening. Rates have risen significantly and have subsequently stabilised. Although economic growth has decelerated, it has not collapsed, leading markets to prematurely conclude that the global economy has withstood the shock. This conclusion, however, is premature. The current phase is not characterised by a high-rate economy but rather a refinancing economy, wherein the genuine effects of previous rate hikes begin to manifest through the resetting of debt.

The illusion of resilience

Between 2020 and 2021, global borrowing occurred at historically low interest rates. Governments increased deficits, corporations secured inexpensive funding, and a significant portion of this borrowing was at fixed rates. When central banks commenced monetary tightening in 2022, the immediate effects were subdued. Borrowers were shielded, as their existing debt remained inexpensive. The system appeared resilient—not due to inherent strength, but because it had not yet been forced to adjust. That adjustment is now beginning.

As illustrated in Chart 1, a substantial volume of global corporate debt is scheduled to mature between 2025 and 2028. This process is not gradual but rather clustered, with refinancing pressures peaking around the middle of the decade. What was once cheap capital will now be refinanced at considerably higher rates. This phenomenon is the refinancing lag in action: The delay between the rise in interest rates and the point at which borrowers experience the repercussions.

Also read: Israel-Iran conflict won’t replicate 1973-like scenario for oil—but it’s a warning for India

From cheap money to expensive survival

The mechanics of the situation are straightforward. A firm that previously borrowed at an interest rate of 3 per cent is now compelled to refinance at rates of 7 or 8 per cent. While the principal amount remains constant, the cost associated with servicing this debt has increased significantly. This represents not merely a marginal tightening but a fundamental shift in financial conditions. The danger of this phase is accentuated by its timing.

As illustrated in Chart 2, firms’ capacity to service debt, indicated by the interest coverage ratio, has already diminished. Higher interest rates have eroded cash flow buffers, and many firms are now operating near thresholds where even minor shocks could push them into financial distress. The critical point is that the refinancing cycle is beginning precisely as borrowers are becoming increasingly vulnerable.

This scenario diverges from the typical depiction of tightening cycles in economic models, which often assume a smooth transmission of higher rates throughout the economy. In practice, however, the impact is both delayed and concentrated. Financial stress does not accumulate uniformly; rather, it builds quietly and then manifests abruptly when debt obligations are reset.

Also read: De-dollarisation is just fashionable debate. Every global crisis sends world back to dollar

Why markets still look calm

Despite the ongoing process, the apparent stability of markets can be attributed to timing and existing buffers. Balance sheets established during periods of low interest rates continue to offer temporary protection, as many firms have yet to face refinancing. At the same time, government expenditures sustain demand, and banking systems, including those in India, exhibit greater resilience compared to previous cycles. This scenario creates the perception that the system has effectively absorbed the shock. However, current stability may be indicative of a delay rather than inherent strength. The behaviour of gold further reinforces this point; its recent decline, despite geopolitical tensions, implies that liquidity conditions, rather than fear, are influencing market dynamics. Investors and institutions are adapting to tighter financial conditions, prioritising liquidity over traditional hedging strategies.

India: A delayed but familiar story

India is entering this phase from a position of relative strength. Corporate balance sheets are more robust and healthy than they were a decade ago, and banks are better capitalised. Economic growth remains strong compared to most major economies. The refinancing dynamic persists, but it arrives with a lag.

Indian firms that accessed global liquidity during the low-interest-rate period will encounter higher refinancing costs as external conditions become more stringent. At the same time, the government’s borrowing programme is absorbing a substantial portion of domestic savings, thereby increasing the cost of capital for private borrowers. The Reserve Bank of India has already emphasised the need to monitor debt-servicing capacity as interest burdens escalate. In other words, India is not insulated; it is simply on a slightly different timeline.

The policy discourse continues to focus on the appropriate level of interest rates, but this is no longer the central issue. The more critical concern is when the effects of these rates will fully manifest. The refinancing lag: The delayed yet concentrated transmission of monetary tightening is being underestimated. Large volumes of debt will reset over a short period, intensifying stress in ways that conventional models fail to capture.

The ongoing debate regarding whether central banks have excessively or insufficiently tightened monetary policy persists. However, the primary concern lies elsewhere. It resides in the forthcoming large adjustment in borrowing costs, which is anticipated to occur at a time when firms are least equipped to manage it. This situation does not represent an immediate crisis; rather, it is a matter of timing, sequencing, and accumulation. By the time this issue becomes visible to all, the effects of the refinancing lag will have already manifested.

Bidisha Bhattacharya is Consulting Editor (Economy) at ThePrint. She tweets @Bidishabh. Views are personal.

(Edited by Theres Sudeep)

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