The sudden, vertigo-inducing 10% plunge in gold prices on 30 January sent shockwaves through markets. For many, it was a signal to flee. For the strategic long-term investor, however, this volatility is not a reason for alarm, but rather a clarifying moment. It separates the speculative froth from the foundational bedrock of gold’s value. While near-term turbulence could persist, the core drivers for a sustained bull market remain intact. Our long-term conviction is rooted in gold’s timeless and proven role as the ultimate geopolitical and policy hedge, as well as its function as a critical portfolio diversifier in a new regime of correlated risk.

What caused the recent volatility?

Gold’s recent sell-off was precipitated by a surge of speculative buying prior to the announcement of the next Fed Chair nominee. This was driven by expectations of USD weakness if US President Trump nominated a dovish candidate, as seen in the US Dollar Index (DXY) touching a 52-week low of 96.2.  Trump’s nomination of Kevin Warsh – widely perceived as an inflation hawk – as the incoming Fed Chair triggered an unwind of these tactical positions, as some investors worried that the USD’s weakness could reverse, given Warsh’s hawkish background.

Structural demand for gold remains intact

This is a short-term recalibration and not a structural shift. The key catalyst driving gold demand is not the next Fed Chair, but Trump. With his presidency, we have learnt to expect the unexpected. Externally, his recent successful ouster of ex-Venezuelan President Maduro to gain unhindered access to the country’s oil reserves could induce a trend of resource nationalism, prompting nations to seek greater control over their natural resources. Internally, initiatives to garner voter support in the November US mid-term elections is expected to bring about more fiscal policy stimulus, which is elevating market concerns about the country’s fiscal deficit. With fragmented global alliances and a growing desire for de-dollarisation, the shifting landscape creates a fertile ground for gold’s protective attributes to reassert themselves. This underpins why global central banks have continued to add gold with limited price elasticity. 

Gold’s increasing role in portfolio diversification

When it comes to portfolio construction, gold is poised to reclaim its role as the non-correlated asset of choice. In the current ‘soft landing’ economic environment – where inflation is structurally stickier – returns on bonds and equities have become positively correlated, meaning they move in the same direction, stripping investors of the protection usually offered by them. Investors increasingly look to gold as an effective portfolio diversifier, as illustrated in the difficult year of 2022 when gold was cushioned from the double-digit declines of both bonds and equities.  

When is a good time to add gold?

A seasonal lull is approaching as buying from China, a major physical market, typically subsides around the Lunar New Year. This offers strategic investors a window. We advise using the near-term pullback towards USD 4,600-4,700/oz to accumulate gold in tranches.

Is silver a better investment than gold?

Not all precious metals are equal. Many investors have been eager to trade on silver, as demand for it tends to rise sharply during periods of global industrial recovery. However, recent activities appear to have tilted towards speculation. Without central banks as steady silver buyers and given the notable decline in the gold-silver price ratio, we favour gold over silver at current levels.

In sum, the recent volatility has washed out the ‘weak hands,’ and the strategic case for gold is stronger than ever, as it is an insurance policy against a world of heightened political risk. It is also a vital diversifier in an era where traditional portfolio ballast may fail. We advocate allocating 6% of an investment portfolio to gold. The path to our 12-month target of USD 5,350/oz will not be a straight line, but the direction remains unequivocally upward. The golden anchor holds.