Gold prices saw a downturn during early Asian trading on Monday, trading around $4,245 per ounce. This decline follows a record-breaking rally that many analysts now consider to be overstretched. After a surge in physical demand during the festive season, appetite for the precious metal appears to be easing.
Market participants are closely watching upcoming economic indicators from China, including the third-quarter Gross Domestic Product (GDP) data and reports on Industrial Production and Retail Sales for September. Last week, gold recorded gains, primarily driven by robust demand in India and significant purchasing by exchange-traded funds (ETFs). However, there are growing indications of profit-taking and consolidation in the market as fundamental factors might already be reflected in current prices.
Pranav Mer, Vice President at EBG – Commodity & Currency Research, JM Financial Services Ltd., commented on the situation, stating, “Gold prices are likely to see some corrections or consolidation as ongoing fundamentals are already priced in and physical demand wanes post mid-week.”
In contrast to the easing demand, heightened tensions in the US-China trade relationship continue to cast shadows over the market. Recent actions, such as China’s implementation of export controls on rare earths, have triggered responses from US trade officials who condemned the move. This exchange of accusations has created an atmosphere of uncertainty, which could lead to a further attraction to safe-haven assets like gold. Sam Stovall, Chief Investment Strategist at CFRA Research, noted, “Trade uncertainty is one driver helping to launch gold prices to all-time highs.”
Historically, gold has served as both a store of value and a medium of exchange. Beyond its aesthetic appeal, the metal is increasingly viewed as a safe-haven investment, particularly during times of economic or geopolitical instability. It’s also considered an effective hedge against inflation and devaluation of currencies, as it is not dependent on any specific issuer or government.
Central banks around the world are the largest holders of gold, often using it to stabilize their currencies amid economic turmoil. Diversifying reserves with gold helps improve the perceived strength of a nation’s economy. The World Gold Council reported that central banks added 1,136 tonnes of gold, valued at approximately $70 billion, to their reserves in 2022—the highest yearly purchase on record. Emerging economies, such as China, India, and Turkey, are notably increasing their gold holdings.
Gold typically moves inversely to the US Dollar and US Treasuries, both of which are major reserve assets. A depreciating dollar usually leads to rising gold prices as investors and central banks seek to diversify their portfolios. Conversely, strong stock market performance often weakens gold prices, while downturns in riskier markets favor the precious metal.
Precious metals prices can be influenced by a variety of factors, including geopolitical instability or concerns surrounding a potential recession. As a non-yielding asset, gold tends to rise in an environment of lower interest rates; however, higher borrowing costs usually exert downward pressure on its price. Ultimately, the fluctuations in gold prices are closely tied to the movements of the US Dollar, as gold is traded in dollar terms. A robust dollar tends to restrain gold prices, while a weaker dollar can spur increases in its valuation.
