Gold went through a period of high volatility after reaching all-time highs. After marking a peak of USD 4,356 per ounce On October 20, the metal fell nearly 5.1% until Friday the 24th. This decline responded to a wave of profit-taking by investors who considered the magnitude of the recent rally excessive and chose to stop positions. Thus, after nine weeks of almost uninterrupted increases, the market decided adjust positions.
Gold’s bullish journey must be understood within the framework of a turbulent international scenario:
- The political crisis in Francewith the resignation of the prime minister Sebastien Lecornu and the failure to contain the highest fiscal deficit in the eurozone;
- The second shutdown longest in the history of USAwhich has accumulated more than 24 days with part of the government paralyzed.
- The imminent assumption of Sanae Takaichi in Japan reignited internal tensions, while new losses at US regional banks raised concerns about the global financial stability. Each news added uncertainty to the markets.
In this environment, US Treasury bond rates fell and numerous investors sought refuge in gold, driving a rise of more than 20% from the end of September to October.
Gold emerges as a reserve of value against the deterioration of fiat money
Metal thus recovered its classic role of active refuge in turbulent times. Behind this escalation was the call “debasement trade”which describes the tendency of investors to protect themselves against currency depreciation due to increasing fiscal deficits. Gold emerges as a reserve of value against the deterioration of fiat money.
Additionally, expectations grew of a rate cut by the Federal Reserve before the end of the year, strengthening the perception that the dollar could weaken and gold gain attractiveness. In April, the announcement of new tariffs between the United States and China had already boosted demand for gold as a refuge from volatility. Although on this occasion the behavior of the other assets was different, the pattern prevailed: fear, cover and search for stability.
After reaching its peak, optimism turned to caution. The correction coincided with signs of distension between United States and Chinawhich softened the demand for safe haven assets.
As of October 20, gold accumulated a drop of 5.1%, although it maintains an improvement of more than 57% so far this year, an extraordinary performance for a typically defensive asset.
In this scenario, international banks warned of possible overexposure to the metal in global portfolios. Some strategists suggested that the market anticipated economic fundamentalspromoting a natural correction after several weeks of euphoria.
As of October 20, gold accumulated a drop of 5.1%, although it maintains an improvement of more than 57% so far this year
Meanwhile, the latest inflation data in the United States provided some relief. In September, the general index went from 0.4% to 0.3% monthly and accumulated 3.0% annually, below the 3.1% expected. Core inflation, which excludes food and energy, also moderated with 0.2% monthly and 3.0% year-on-year, confirming the cooling of prices.
This data strengthened the perception of disinflation and opened the door to a possible Fed rate cut at its next meeting.
Faced with this reality, the inflationary slowdown took away the momentum of gold in its defensive role, just after the strong rise. However, if the Fed confirms a shift towards lower rates, the metal could regain interest in the medium termalthough with a more stable and less abrupt dynamic than that of recent weeks.
The author is an Analyst at PPI (Personal Investment Portfolio)
