Gold pulls back after strong rally

The nearly 29% decline from the record high of US$5,594 per ounce has once again highlighted the inherent volatility of gold, despite its long-standing reputation as a safe-haven asset.

Following an impressive rally from around US$2,000 per ounce in early 2024 to a historic peak in January 2026, the gold market entered a sharp correction. Prices fell below US$4,000 per ounce, surprising many investors given that the decline occurred amid heightened geopolitical tensions in the Middle East.

Why Gold Corrected

Traditionally, gold performs well during periods of elevated uncertainty, serving as a hedge against geopolitical risks and financial market turbulence. This time, however, market dynamics unfolded differently.

Analysts attribute the sharp decline primarily to renewed inflationary pressures driven by the energy crisis, which reinforced expectations that the U.S. Federal Reserve (Fed), along with other major central banks, would maintain elevated interest rates or potentially tighten monetary policy further.

A higher interest-rate environment increases the appeal of fixed-income investments, reducing demand for gold, which generates neither interest income nor dividends.

At the same time, renewed optimism across global equity markets—led by technology and artificial intelligence companies—prompted investors to reallocate capital away from gold. Profit-taking by investors who had accumulated positions at substantially lower prices also added to downward pressure.

An Investment Characterised by Long Cycles

Gold’s history demonstrates that pronounced price swings are not the exception but rather a defining feature of the market.

Following its record high in 1980, when prices surged to US$680 per ounce during the second oil crisis, gold entered a prolonged downturn that lasted nearly four decades.

The next major bull market followed the 2008 global financial crisis, driving prices above US$1,860 per ounce in 2011. A lengthy correction followed until the COVID-19 pandemic renewed demand for safe-haven assets, pushing gold above US$2,000 per ounce in 2020.

Historical evidence suggests that gold is primarily a long-term store of value rather than an instrument for generating short-term returns.

ETFs and Central Banks Continue to Shape the Market

Exchange-traded funds (ETFs) backed by physical gold have played a decisive role in recent market developments. The same investment flows that fuelled gold’s strong rally over the past two years have now reversed, with persistent outflows adding further pressure to prices.

In contrast, central banks continue to be consistent buyers of the precious metal as they pursue strategies aimed at strengthening their foreign exchange reserves.

According to a recent survey by the World Gold Council, nearly one in two central banks (45%) expects to increase its gold holdings over the next twelve months. Inflation protection, reserve diversification, and resilience against rising geopolitical risks remain the primary motivations.

At the same time, 74% of central banks expect to gradually reduce their exposure to U.S. dollar-denominated assets over the next five years, a trend likely to continue supporting structural demand for gold.

Long-Term Value, Not Short-Term Safety

Despite the sharp correction in recent months, analysts maintain that gold continues to play an important role as a portfolio hedge within a diversified investment strategy. However, recent price action serves as a reminder that even traditional safe-haven assets are subject to significant volatility, particularly when expectations regarding interest rates, inflation, and monetary policy shift.

For investors, the key takeaway is that gold remains an effective long-term store of value, but it should not be regarded as an investment free from short-term risk.