Gold prices have fallen by 29% from their record high at the end of January, underlining that while the precious metal remains a traditional safe investment, it may be more suitable for long-term investors.
The metal experienced a dramatic rise, climbing from around $2,000 per ounce in February 2024 to a record peak before reversing course. Prices later dropped below the $4,000 mark after geopolitical tensions in the Middle East intensified.
Although gold has traditionally benefited during periods of uncertainty, recent market developments have pushed it in the opposite direction.
Inflation and interest rates weigh on sentiment
Analysts attribute the significant drop in gold prices largely to rising inflation pressures linked to the energy crisis and increasing expectations that major central banks would raise interest rates.
Higher interest rates generally make fixed-income investments more attractive, reducing demand for assets such as gold that do not generate yields.
The European Central Bank has already moved towards tighter monetary policy, reinforcing market expectations that investors may continue shifting towards interest-bearing assets.
Stock market rally shifts investor attention
Some analysts also believe gold prices became a victim of renewed strength in equity markets.
Following the initial shock caused by geopolitical developments, stock markets regained momentum, particularly in sectors linked to artificial intelligence and broader technology industries.
Profit-taking by private investors who purchased gold at significantly lower levels may also have contributed to the downward trend.
History points to long-term cycles
Historical trends show that gold has previously experienced substantial declines after reaching peak levels.
Following the second oil crisis in 1980, gold prices surged sharply before entering a prolonged period of lower valuations that lasted for decades.
The precious metal only regained stronger momentum after the global financial crisis that began in 2007, before rising further during the coronavirus pandemic as investors sought safer assets.
Central banks continue buying gold
Despite recent market weakness, central banks continue strengthening their gold reserves.
Exchange-traded funds (ETFs), which played a major role in driving gold higher over the past two years, have recently recorded steady outflows. However, central bank demand remains supportive.
A recent survey by the World Gold Council found that 45% of central banks expect their gold holdings to increase over the next year.
Inflation protection, portfolio diversification and shielding against geopolitical risks remain among the main reasons central banks continue to hold gold.
Also read: Asian stock markets slide as tech shares tumble
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