IMAGE: EPARDAFAS
GOLD WAS flogged as the ultimate safe haven. It has just taken a kick in the teeth. On October 23rd bullion fell below $4,000 an ounce for the first time since July, touching $3,986.50—roughly a quarter below January’s record. This happened amid geopolitical tension, an oil-price spike and growing fear of tighter American monetary policy. For an asset sold as insurance against uncertainty, the timing stinks.
The trouble starts with oil. Attacks on energy infrastructure and fears of supply disruption have pushed crude higher, feeding inflation. That makes the Federal Reserve’s job nastier. Investors who had hoped for rate cuts are now bracing for a possible rise in December. Markets expect the Fed to hold at its October 27th-28th meeting, but the prospect of tighter policy later has already puked on gold.
Gold pays no interest. When government bonds offer better returns, holding bullion becomes more expensive in opportunity-cost terms. Higher yields can also strengthen the dollar, making gold pricier for buyers using other currencies. Both forces helped drive September’s 8.5% monthly decline to $4,176 an ounce, according to the World Gold Council. By October 23rd the pressure had intensified.
The bigger problem is that gold had become a crowded, smug bet. Its price surged to a record $5,405 an ounce in January, fuelled by central-bank purchases, geopolitical fear and investors seeking shelter from mounting government debt. ETFs and speculative traders piled in. When prices turned, the exit got ugly. A sell-off in technology shares added to the pressure as investors dumped liquid assets, including gold, to meet margin calls elsewhere. A refuge becomes a source of cash when portfolios bleed.
The fall exposes a weak spot in gold’s popular bullshit case: political turmoil alone does not guarantee rising prices. The kind of crisis matters. A conflict that threatens oil supplies can drive inflation higher, push bond yields up and tighten monetary policy. That combination can hurt gold even as geopolitical risks grow. The metal offers protection against some dangers, not immunity from all of them.
Yet the bullish case has hardly vanished. Central banks continue to diversify reserves, partly to reduce dependence on the dollar. After Western governments froze Russian reserves following the invasion of Ukraine, gold gained appeal as an asset held outside another country’s financial system. Governments also face heavy debt burdens, while investors worry about inflation and the long-term value of paper currencies. These forces helped sustain demand even as interest rates rose.
The World Gold Council reported that global gold-backed ETFs attracted $10bn in September. Holdings rose by 67 tonnes to a record 4,256 tonnes, despite falling prices. In the third quarter, inflows reached a record $31bn. Such figures suggest some investors treated the decline as a buying opportunity. They also show why the current correction may prove volatile: long-term buyers and short-term traders are pulling in different directions.
For buyers who entered near the peak, the losses are already painful. Those considering a purchase now face a tough question: has gold become cheaper, or has the market begun to price in a world of higher interest rates? The answer depends on oil prices, inflation, the dollar and central-bank policy. A renewed decline in yields could revive the rally. Persistent inflation and tighter policy could keep bullion under pressure.
Gold still has a place in a diversified portfolio. Its appeal rests on scarce supply, broad acceptance and independence from any single government’s promise to repay a debt. But the January surge encouraged a more extravagant belief: that every new danger would send prices higher. October has delivered a sharp correction to that idea. Gold can insure a portfolio against certain shocks. It cannot promise a profit and it cannot repeal the laws of markets. ■
