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Gold has swung from a record $US5595 an ounce in January to about $US4160 this week, buffeted by the Middle East war, stubborn inflation and rising US interest rates. Markets expect further Fed increases while China weighs cheaper buying opportunities.
Gold has tumbled to about $US4160 an ounce this week after a volatile 2026 that took the metal from a record high of $US5595 an ounce in late January to a year low below $US4000 an ounce in July.
Gold Price Swings Amid Global Turmoil
The metal then recovered to just under $US4700 an ounce in late August before sliding back to around $US4160, with the spot market near $US4135 an ounce. The swings reflect cross-currents from the war in the Middle East, fiscal stress in developed economies, stubborn inflation, bond market turmoil and turbulent currency markets.
Many of those influences are centred in the US and flow from the impact of the war with Iran on oil and its derivative products, although the boom in artificial intelligence-related investment is also playing a role. The gold rush that pushed the metal to record highs in January was sparked by the three rate cuts the US Federal Reserve made last year as it shifted its focus from inflation to growth.
Gold has historically been regarded as a hedge against inflation but it also has an inverse correlation with interest rates. It generates no income but carries holding and opportunity costs, so a lower rate environment makes it more attractive.
With the US flirting with stagflation last year, low growth but relatively high inflation, and unsettling discussions about how the Trump administration might respond to public finances spiralling out of control, gold's safe haven status was another factor in the price surge. China's record buying activity last year, when it purchased more than 1000 tonnes of gold, a 60 per cent-plus increase on its 2024 purchases, also helped.
Central Banks Turn Toward Gold
After the 2023 freezing of Russia's dollar-denominated offshore reserves following its invasion of Ukraine, China's central bank and other central banks increasingly shifted reserves out of US Treasuries and into gold. Donald Trump's trade wars with the rest of the world may have provided an extra incentive for China, and even America's traditional allies, to reduce their exposure to the US.
Aided at the margin by a stronger yuan, China has bought gold almost regardless of the price, so the sharp fall in recent weeks should create an appealing buying opportunity. With China's property market five years into a seemingly endless downwards spiral, households have also been heavy buyers of gold in the absence of property as a viable investment. That source of buying seems to have shrunk somewhat in recent months as China's domestic economy appears stressed.
The war and an oil price that has soared from around $US70 a barrel to more than $US100 a barrel, forcing petrol and diesel prices up by far greater amounts, is the obvious culprit behind the shift from bull market to steady decline. It is feeding into higher inflation and interest rates and slower growth in most of the world.
The US, the key economy for global financial markets, does not have that slower growth, thanks to extraordinary levels of AI investment and the wealth effects of a sharemarket at near record levels. It does, however, face high inflation that has forced the Fed to reluctantly start raising US interest rates for the first time in more than three years.
US Fiscal Strains and Bond Yields
America, along with much of the developed world, also has deteriorating public finances, with a deficit close to 6 per cent, gross government debt of more than $US40 trillion and an annual interest bill of around $US1 trillion that rises every time a longer-dated bond matures. The combination of continuing high inflation, competition for capital between the government and AI companies, and fear that the Trump administration might try to inflate its way out of its fiscal trap has prompted bond investors to take matters into their own hands.
That has forced yields up to levels not seen for nearly two decades. Trump's assault on the post-WWII order and his America First approach to geopolitics and geoeconomics have rocked the gold price. America's unsustainable public finances and turbulence in the world's most important financial market might make holding more gold appealing. But the surge in yields has increased both the cost and the opportunity cost of holding it.
Hence the recent tumble in the price. The inverse relationship between gold and US interest rates is unlikely to disappear for some time. Markets are now pricing in a 70 per cent probability that this month's 25 basis point increase in the federal funds rate will be followed by a similar move next month. Indeed, 100 basis points of increases, a full percentage point, is expected over the next 12 months.
Gold Outlook and Dollar Strength
That probably adds more pessimism to the outlook for gold, but it may also accelerate the decline of the US bond market as the most important market in the world. China, which has cut its holdings of US Treasuries from a peak of $US1.3 trillion in 2013 to $US618 billion even as it built its gold holdings, is not the only country that will see the cheaper gold price as an opportunity.
That is provided the US dollar's relative strength, up more than 2 per cent against its major trading partners' currencies this month, does not offset the price decline. Gold remains the biggest store of central bank reserves and at the end of last year accounted for a major share. As an indicator of how troubled, messy and confusing the emerging new world order and the debt-laden global economy are, the gold price is providing some appropriately volatile signals.
theage
smh:This story was compiled and edited by the HeadTopics newsroom and HT AI from the reports above.
US Federal Reserve Rate Rises Middle East War Oil Prices China Gold Buying US Fiscal And Bond Market Stress
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