The price of gold has retreated approximately 25% from its record high at the start of the year, prompting some long-term bullish investors to reassess their positions. High interest rates and a robust US dollar are exerting the most significant near-term pressure. However, market observers believe this is merely an adjustment within a broader, long-term transition of gold's role as a reserve asset.
Following a notable pullback from its historical peak, even investors with a long-standing positive view on gold are adopting a more cautious stance. In the short term, the market's primary focus is not on safe-haven sentiment itself, but rather on how elevated interest rates, a strong dollar, and rising energy costs collectively increase the opportunity cost of holding gold. From a longer-term perspective, however, some market participants maintain that gold's role as a reserve asset is, in fact, strengthening.
Stu Bradley, an 83-year-old retired financial advisor from Michigan, sold a portion of his holdings earlier this year after gold surged above $5,000 per ounce to reach an all-time high, as he doubted prices could sustain such rapid gains in the near term. Currently, about 10% of his investment portfolio remains allocated to gold and silver.
He is now relieved he reduced his exposure. Gold is down roughly 25% from its January peak. The largest gold exchange-traded fund, SPDR Gold Shares, has also declined about 26% from its record closing high in January. Silver, a typically more volatile safe-haven asset, has plummeted 50% from its earlier 2024 high.
Investors are concerned that conflict with Iran could drive energy prices and inflation higher, potentially forcing the Federal Reserve to maintain elevated interest rates. Suki Cooper, head of commodities research at Standard Chartered, stated, "That raises the opportunity cost of holding gold, or the perceived opportunity cost of holding gold, which is putting pressure on prices in the short term."
Gold's sustained rally last year was fueled by investors seeking a hedge against inflation pressures from potential Trump tariffs, expectations for Fed rate cuts, and concerns over the tech stock frenzy. The recent decline began early this year as geopolitical tensions escalated and energy prices rose. Alex Shahidi, co-chief investment officer at Evoke Advisors, noted that rising energy costs also prompted some central banks to sell gold to boost liquidity. By late June, gold briefly fell to $3,990 an ounce, a three-month low, before fluctuating amid Middle East peace negotiations.
Aakash Doshi, head of gold strategy at State Street Global Advisors, emphasized that Federal Reserve interest rate decisions have a greater impact on gold than daily geopolitical shifts. He remarked, "A temporary breakdown in a ceasefire doesn't mean the market thinks we're going back to March, April levels of conflict. That's just daily noise."
Nevertheless, not all investors are reducing their holdings. Bradley indicated he is holding his remaining gold position steady, stating, "Gold is pretty stable."
Richard Elias, a 76-year-old retired financial advisor in St. Louis, allocated about 3% of his portfolio to gold following the 2008 financial crisis and has maintained that allocation since, though he shifted some into physical gold coins. He said, "Holding a gold coin in your hand is different than holding a substitute for it." He has not adjusted his position during this volatility, viewing the pullback as "just a normal correction."
The Golden Paradox: Why a Strong Dollar Could Be a Long-Term Positive
In a recent in-depth monthly review of the gold market, Paul Wong, managing partner and market strategist at Sprott Inc., argued that gold's recent decline reveals a crucial paradox: while a strong US dollar suppresses gold prices in the short run, it ultimately reinforces the long-term investment thesis for the metal.
He wrote that the first wave of selling in June began with the US-Iran Islamabad Memorandum of Understanding, which triggered a sharp oil price drop and dollar strength. The second wave stemmed from a hawkish market interpretation of comments by new Fed Chair Kevin Warsh following the June meeting.
Wong explained that rate hike expectations pushed up short-end yields and bolstered the dollar, a combination most quantitative traders view as negative for gold. Investment funds sold gold from March to May to unwind highly leveraged positions and continued selling in June amid deteriorating macro data and reduced gold purchases by sovereign-related entities. Commodity trading advisors, quant funds, and algorithmic funds were the primary drivers of June's "waterfall decline."
He believes the gold price decline has significantly exceeded the actual moves in the dollar and the federal funds rate, suggesting much of the potential negative impact from the high-rate, strong-dollar combination is already priced in. He also noted that in June, gold broke below its 200-day moving average for the first time since October 2023, entering deeply oversold territory. The current pullback of -26% marks the largest retracement in a decade from a low point, dating back to 2016. Meanwhile, the US Dollar Index is up 2.91% year-to-date, and the US two-year Treasury yield has risen 70 basis points. Federal funds futures, which priced in 2.3 rate cuts for the remainder of 2026 at the start of the year, now price in 1.5 hikes.
In his view, one of the market's most important current narratives is the apparent policy conflict within the Fed: whether Chair Warsh will prioritize inflation control or yield to political and market pressures to cut rates.
Wong posits that the market remains skeptical Warsh will maintain a truly hawkish stance, as many still believe in the "Fed put"—the idea that policymakers will ultimately pivot to rate cuts after a significant market downturn. He said Trump's preferred outcome is clearly low rates, strong growth, a rising stock market, and continued investment, but the problem is the current economic environment doesn't clearly justify easing. "The growing tension between inflation, politics, and central bank credibility creates an environment that has historically supported gold."
Within a longer-term framework, Wong reiterated that the US dollar may be in a long-term downtrend but will still experience periodic, powerful rallies. He argues that massive fiscal deficits, rising debt burdens, persistent monetary expansion, accelerated central bank gold buying, and geopolitical fragmentation are eroding the dollar-centric system. This does not, however, prevent the dollar from strengthening significantly in phases, putting pressure on commodities, precious metals, emerging markets, and risk assets.
Understanding this, he suggests, requires distinguishing between the long-term evolution of the dollar's role and its structural position in global financial system settlements. Even as the dollar's long-term role as a reserve currency diminishes, its central position in global funding and settlement will keep it cyclically strong for many years to come. Each episode of dollar strength increases the debt-servicing costs for foreign borrowers, tightens global liquidity, raises funding costs, and forces traders to unwind leveraged and carry-trade positions.
He simultaneously points out that the stronger the dollar becomes, the greater the incentive for nations to seek alternatives. He believes the most likely outcome is not a single currency replacing the dollar, but a more diversified system: the dollar remains dominant in reserves and funding, other currencies gain importance in trade, regional currencies become more significant, and gold serves as a neutral reserve asset among competing blocs.
Wong wrote that gold's uniqueness lies in its status as an "outside money": "Unlike a sovereign currency, it carries no political allegiance. Unlike a government bond, it has no counterparty risk. Unlike a bank deposit, it cannot be frozen or sanctioned if held domestically." Against a backdrop of heightened geopolitical tensions and accelerating reserve diversification, central banks are increasingly viewing gold as a strategic reserve asset. Its role is expanding from an inflation hedge to a currency hedge, a reserve asset, and potentially a form of monetary collateral.
He also explained a seemingly counterintuitive phenomenon: during financial and liquidity crises, gold is sometimes sold off. This could happen again in future dollar shortages. This does not mean gold has lost its utility but indicates it is functioning as a reserve asset.
Wong concluded by emphasizing that gold and the dollar could even rise simultaneously over the long term for different reasons: gold reflects rising demand for a neutral reserve asset and store of value, while the dollar reflects its core role in the global funding system. From a cyclical perspective, however, gold still tends to be negatively correlated with the dollar index. In other words, the dollar's cyclical rebounds and the strengthening of gold's long-term monetary role are not contradictory.
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