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Thought of the day

Gold fell below USD 4,000/oz on Wednesday for the first time since November, weighed down by a strong US dollar and the prospect of higher interest rates. The latest setback brought the yellow metal over 26% below its all-time high set in January.

Momentum and technical indicators suggest that gold prices may continue to trade in a USD 3,850-4,000/oz range in the near term, as the recent rise in real yields and the US dollar's strength raise the opportunity cost of holding gold.

But we expect gold to move toward USD 5,200/oz over the next 12 months, and see the current level as an opportunity for underallocated investors to build exposure.

The Federal Reserve is unlikely to raise rates in the near term. Markets are looking to today’s core personal consumption expenditures price index to assess the Federal Reserve’s likely interest-rate path, with consensus pointing to another acceleration to 3.4% year over year. But while this gauge of inflation may stay firm, we expect trimmed mean and market-based measures, which are favored by Chair Kevin Warsh, to continue to track closer to the central bank’s objective. We also expect inflation to moderate in the coming months, as tariff effects have started to fade. While the Fed is likely to stay on hold for the rest of this year, we do see the next move as a rate cut in 2027, and gold should find support when markets start to roll back their expectations for Fed hikes. Slower growth amid fading fiscal support into the next year should also create a more favorable backdrop for bullion.

We see scope for renewed US dollar weakness. While the US dollar may remain supported in the near term, long USD positioning appears stretched, in our view, which should limit the potential for further significant gains in the greenback. Structural challenges, including large fiscal and external deficits and already elevated investor allocations to US dollar assets, also suggest the balance of risks will become less supportive over time. A weaker dollar has historically been a powerful tailwind for gold.

Robust central bank demand remains a critical pillar of support. Preliminary data for May showed a pickup in central bank purchases, with Poland buying 18 metric tons of gold and China securing 10 metric tons. We expect overall central bank purchases to remain within the range of 750-1,000 metric tons on an annual basis. While such demand may not drive prices sharply higher on its own, we believe it will provide a stable foundation for the market.

So, we believe the long-term investment case for gold remains positive, and we like the diversification benefits the yellow metal offers during periods of equity market stress, geopolitical uncertainty, inflation surprises, and episodes of declining confidence in fiat currencies. Its relatively low historical correlation with traditional asset classes means that it should add to overall portfolio resilience over time. We view an allocation of up to mid-single digits as appropriate for investors with an affinity for real assets.