Legend has it that at the end of the rainbow there is a pot of gold, but reality suggests that the yellow metal is in free fall, with no bottom in sight. Gold has lost a quarter of its value in just five months since reaching record highs in late January, when an ounce surpassed $5,400. After two days of sharp declines, it fell below $4,000 an ounce on Wednesday for the first time since last November, although it recovered the $4,000 mark by the close of European trading. It is the metal’s biggest correction since the financial crisis, and the situation bears some similarities.
“Gold is expected to trade toward the lower end of its recent ranges while markets await greater clarity on the outcome of the conflict in the Middle East,” analysts at UBP estimate. In that context, it has lost ground against the greenback, as the dollar has strengthened, backed by its role in oil trade and by the United States’ position as a major energy exporter.
Over the past century, gold has built its reputation as a safe-haven investment— meaning it tends to resist stock market downturns — based on its physically limited supply. Traditionally, investors buy gold (in bullion or financial contracts) as a hedge against inflation or volatility in other assets: when the world turns turbulent, gold holds steady.
However, this pattern has shifted in recent years. Both retail investors and large financial institutions have increasingly accessed the metal through simple products such as exchange-traded funds (ETFs), causing it to move more in line with equities and risk assets: gold is no longer bought because it doesn’t fall, but in the expectation that it will rise. That dynamic initially helped fuel a tripling in prices over the past three years, to their peak last January; now, however, it is backfiring.
The outlook for gold is further complicated by rising expectations of interest rate hikes in the United States, in response to rising inflation, which is at 4.2%, its highest level in three years. Last week, the Federal Reserve left rates unchanged in its first decision under new Fed chair Kevin Warsh, but the market is beginning to price in a more hawkish turn. Futures on federal funds rates — which reflect investors’ expectations for U.S. interest rates — now assign a probability of over 50% to a hike after the summer, compared with less than 30% just a week ago.
A tighter monetary policy would strengthen the dollar — historically a headwind for gold — and raise bond yields, another asset that competes directly with gold for the attention of more conservative investors. “The apparent end to the conflict in the Middle East, combined with a more hawkish Fed, has caused prices to retreat as gold’s safe haven appeal fades together with the prospect of higher interest rates and a stronger USD, with a Fed rate hike in Q4 now fully priced in,” analysts at investment bank Macquarie Group said in a note published this week.
Now weighed down by rate-hike expectations, the outlook for gold is gradually cooling. Investment banks Deutsche Bank and Goldman Sachs have lowered their year-end forecasts for the metal in recent days, although they still see potential for a recovery in the coming months, supported by steady demand from central banks, the world’s largest buyers of gold. A survey by the World Gold Council, the industry’s main association, shows that 45% of institutions plan to increase their holdings.
Even so, analysts have made significant downward revisions to their year-end price forecasts. Goldman Sachs cut its outlook by $500 to $4,900 per ounce. Bank forecasts tend to be cautious, however, so price movements over the period could be more pronounced than those targets suggest.
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