Gold is facing its most severe test since 2026.
Influenced by strong US non-farm payroll data and heightened interest rate hike expectations, the international gold price has fallen for two consecutive days, currently fluctuating around $4,300 per ounce, having nearly erased all its gains for the year.
As the leading performer in last year's rally, gold has been declining for three consecutive months since hitting its annual high of $5,626.8 per ounce at the end of January this year, despite intermittent rebounds. The shift from last year's comfortable uptrend to this year's significant volatility has led to growing market debate over whether gold should continue to be held.
Reasons for the Recent Sharp Decline in Gold Prices
The direct catalyst was the US May non-farm payroll data released on June 5th. The data showed an addition of 172,000 jobs, far exceeding the market expectation of 85,000, with the figures for March and April being revised upward by a combined 93,000.
The unexpected strength in the labor market has triggered a market repricing of the Federal Reserve's monetary policy. Following the jobs data release, the probability of a December rate hike rose to 63%, up from just 48% before the data, with traders now expecting the Fed to hike by the end of January next year, compared to a previous expectation of the end of March.
Simultaneously, the Middle East situation remains tense, with unresolved differences between Iran and the US over a ceasefire. Disruptions to energy flows through the Strait of Hormuz have pushed oil prices higher, further exacerbating global inflation concerns and increasing the likelihood that central banks will maintain high interest rates or even raise them further.
The rise in rate hike expectations directly pressures gold prices. As gold does not generate interest, its appeal diminishes when rate hike expectations rise, as the US dollar and US Treasury yields typically strengthen. Additionally, the opportunity cost of holding gold increases, leading funds to flow towards interest-bearing assets, thereby weighing on gold prices.
Another pressure point for gold comes from liquidity. During periods of market turbulence, institutions facing funding pressures often first sell their most liquid assets. Precisely because gold can be sold easily, it becomes a primary source of funds.
Data from the World Gold Council shows that in March 2026, Turkey's central bank, once the world's top gold buyer, sold 79 tonnes of gold while conducting an additional 80 tonnes via gold swaps. The purpose was precisely to use gold as an emergency liquidity tool to alleviate foreign exchange pressure and stabilize the domestic currency.
Concurrently, the strong performance in the AI sector continues to drain market liquidity. The high interest in the AI industry chain this year has persisted, and following first-quarter earnings reports, related companies have significantly increased capital expenditures. The prominent high-growth prospects and profit-making effects have further diverted incremental funds away from the gold market, adding downward pressure on prices.
Can Central Bank Purchases Support the Gold Price?
Data released by China's central bank on June 7th showed that gold reserves stood at 74.96 million ounces at the end of May, an increase of 320,000 ounces from the previous month, marking the 19th consecutive month of gold purchases by the People's Bank of China. As gold prices entered a volatile downtrend, the central bank has intensified its buying, with May's purchase volume hitting a 15-month high.
In recent years, global central banks have also persistently increased their gold purchases. The latest report from the European Central Bank indicates that by the end of 2025, gold's share of global official reserves (foreign exchange + gold) rose to 27%, surpassing US Treasuries to become the world's largest reserve asset.
However, against the backdrop of sustained central bank gold buying, why hasn't this prevented the decline in gold prices?
In reality, the sustained gold purchases by global central banks are fundamentally a long-term reserve allocation strategy, not aimed at driving up prices. Furthermore, the volume and trading pace of these purchases cannot offset the negative pressure from market-level factors.
Looking at the factors influencing gold price trends, short-term prices are primarily driven by US Treasury yields, the US dollar's performance, and institutional fund flows. Factors such as rate hike expectations and concentrated selling triggered by market liquidity stress generate selling pressure that far outweighs central bank buying, hence the continued downward trend in prices.
In other words, central bank purchases demonstrate global recognition of gold's medium-to-long-term allocation value, but reversing the price trend requires the combined effect of more factors.
Firstly, a shift in Federal Reserve monetary policy expectations back towards easing is the core driver for a sustained medium-to-long-term gold rally. When the market forms a consensus that the Fed will return to a looser policy stance, leading to lower US dollar funding costs and a decline in US Treasury yields, funds will consistently flow into gold, pushing prices higher.
Secondly, a phase change in the global inflation environment could help. On one hand, if Middle East geopolitical tensions ease and the price center for commodities like crude oil declines, leading to a gradual cooling of global inflation pressure, it would help create space for the Fed to cut rates, indirectly benefiting gold. On the other hand, if inflation proves persistent while real interest rates decline, gold's inflation-hedging value would become prominent, also supporting price increases.
Thirdly, a resurgence of the narrative around a weakening US dollar credit would be positive. Gold is a natural hedge against the US dollar. When concerns about dollar credit intensify and market confidence in dollar assets wanes, funds actively allocate to gold for risk diversification, driving prices up.
Fourthly, increased downward pressure on the global economy could be a catalyst. If growth in the US and other major global economies slows and recession risks rise, leading to a decline in market risk appetite and pressure on equity assets, gold as a traditional safe-haven asset would attract buying. Combined with economic weakness potentially forcing the Fed to turn dovish, this would create a dual tailwind.
Is Gold Still Worth Holding at This Stage?
In the short term, gold is likely to maintain a volatile pattern. High oil prices are pushing up inflation expectations, and strong US employment data further increases the possibility of the Fed maintaining high interest rates. A strong dollar, strong jobs market, and expectations for higher rates will likely exert some downward pressure on gold in the near term.
From a long-term perspective, gold still holds significant allocation value. Medium-to-long-term factors such as fiscal deficits, geopolitical tensions, and monetary concerns continue to underpin gold demand. In the context of monetary over-issuance and fiscal deficit monetization, the US dollar credit system faces challenges. Coupled with frequent global geopolitical turmoil driving asset reserve diversification, demand for gold as a safe asset continues to rise. The global trend of 'de-dollarization' positions gold to potentially become a new pricing anchor.
For investment purposes, if investors are bullish on gold's medium-to-long-term value, they can participate through gold ETFs. Compared to physical gold, which has high liquidation difficulty and low trading flexibility, gold ETFs directly track the gold price, with one lot corresponding to 1 gram of physical gold, offering better liquidity and trading flexibility than physical gold or gold futures.
As of June 9th, the Guotai Gold ETF (518800) has assets under management exceeding 36 billion yuan, with consistently active trading, making it a core tool for investors to participate in gold investment, diversify portfolio risk, and hedge against uncertainty.
In November last year, the state introduced new gold tax policies. A core provision stipulates that Value-Added Tax (VAT) is levied on physical gold withdrawn through exchanges. However, non-physicalized investment through the Guotai Gold ETF (518800), where the corresponding gold assets are also stored in exchange vaults without physical withdrawal, is exempt from VAT.
For off-exchange investors, considering related feeder funds (Class A 000218, Class C 004253, Class E 022502) is also an option. These feeder funds primarily invest in the Guotai Gold ETF and are expected to have similar risk and return profiles to gold assets, representing another good choice for gold investment.
Investors should be aware of the risks involved in such investments.
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