Recently, international gold prices have experienced a rapid decline, falling from a record high of $5,600 per ounce to below $4,500 per ounce, a drop of approximately 20%, which constitutes a significant correction. However, this decline does not alter the long-term bullish trend for gold. The short-term drop is primarily influenced by the following factors:
First, the new Federal Reserve Chair, Walsh, has officially taken office. Based on his previous statements, the market anticipates that under his leadership, the Fed may initiate quantitative tightening, involving the sale of assets such as Treasury bonds held by the Fed to withdraw liquidity from the market and reduce the money supply. This exerts considerable downward pressure on asset prices, including gold. In fact, prices of other non-ferrous metals have also seen substantial declines.
Second, following the blockade of the Strait of Hormuz, international oil prices rose from around $70 per barrel before the conflict to approximately $100 per barrel. Although recent signals from U.S. President Trump suggest substantive negotiations with Iran and an early reopening of the strait, no agreement has been finalized yet, and the reopening date remains uncertain, leading to significant volatility in oil prices. As the lifeblood of industry, rising oil prices drive up global inflation, particularly impacting U.S. inflation, which may prompt the Fed to delay interest rate cuts. It is anticipated that Chair Walsh might opt for a rate cut at year-end or possibly forego cuts this year altogether, thereby suppressing gold prices.
Third, international gold prices have surged significantly over the past two years. When gold was at $1,900 per ounce, it was projected that it could break through $5,000 per ounce in the future, a target achieved ahead of schedule in just two years, accumulating substantial profit-taking positions. Consequently, once a short-term downtrend in gold prices forms, it may trigger significant profit-taking selling pressure, further accelerating the decline.
Nevertheless, the fundamental rationale for remaining bullish on gold remains unchanged: the increasing issuance of U.S. dollars, the trend towards de-dollarization, and the soaring U.S. government debt all support a long-term upward trend for gold priced in dollars. The current decline is largely driven by short-term factors.
Recent U.S. inflation indicators, such as the PCE data, also impact gold trends. Previously released U.S. CPI data reached 3.8%, a multi-year high, leading market expectations of rising U.S. inflation and repeated delays in Fed rate cuts, further dampening gold's performance. The latest PCE data also exceeded expectations, prompting the Fed to exercise greater caution regarding rate cuts. Some investors even anticipate a potential shift from a rate-cutting cycle to a rate-hiking cycle, which would significantly impact gold prices and undoubtedly contribute to short-term volatility.
Although the recent Middle East conflict would typically boost safe-haven demand and drive gold prices higher, the region is the world's primary oil-producing area. The conflict has led to a sharp rise in oil prices, directly fueling global inflation and consequently delaying Fed rate cuts, adversely affecting gold. Additionally, countries such as Turkey have sold gold reserves to raise cash, increasing selling pressure on gold. In this instance, safe-haven demand for gold has been overshadowed by liquidity concerns, with increased supply from these sales contributing to the price decline. In the long term, central banks, including the People's Bank of China, are expected to continue actively increasing their holdings of physical gold, indicating sustained substantial demand. Some European institutions have also been selling U.S. Treasury bonds this year to acquire physical assets like gold, aiming to hedge against the long-term depreciation trend of the U.S. dollar.
Recently, the U.S. dollar index has experienced a rapid rebound, approaching the 100 mark. The dollar and gold typically exhibit a seesaw effect; thus, a rising dollar index leading to a decline in gold prices is not surprising. Currently, institutional views on gold in the short term are cautious, but long-term outlooks remain bullish. Several major investment banks have indicated that international gold prices could still reach new highs in the future, although short-term negative factors may influence prices. Therefore, investing in gold should focus on long-term allocation as part of a diversified asset portfolio rather than short-term fluctuations. While short-term volatility is challenging to predict, each significant decline may present a favorable opportunity for positioning. For investors who missed earlier opportunities, the recent rapid adjustment in gold prices may offer chances to allocate to assets such as physical gold, gold ETFs, gold funds, or gold stocks. Long-term prospects suggest that the upward trend in gold prices is unlikely to change, supported by enduring fundamentals. The inversion of long-term returns on some bank gold products also indicates that market sentiment remains bullish on gold over the long term, despite short-term overselling. The rapid decline in gold prices has led some risk-averse investors to sell, with emerging views suggesting that gold may no longer be a safe-haven asset but rather a risk asset, given its doubled price over the past two years, accumulated profits, increased volatility, and characteristics akin to risk assets. This also explains the significant fluctuations in returns on gold-related products offered by some banks.
Regarding gold allocation strategies, it may be advisable to buy on dips during each significant decline, employing a phased approach rather than a lump-sum investment to mitigate risks associated with short-term overselling. Short-term risks have not fully dissipated, and gold price volatility is inevitable, necessitating attention to the risk of over-adjustment. A phased buying strategy on dips may be prudent currently, with a relatively longer holding period to smooth out returns affected by short-term fluctuations. Since the collapse of the Bretton Woods system, the long-term allocation value of gold has increasingly grown. The trend of increasing U.S. dollar issuance persists, supporting a positive long-term outlook for gold. It has been recommended to allocate approximately 20% of an investment portfolio to gold-related assets, a suitable proportion that offers flexibility and long-term protection against fiat currency depreciation risks. Each household can adjust this ratio based on individual circumstances.
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