It depends. On what? Essentially, on how an investor views an investment in gold: as a strategic asset or a tactical position? The latest reports from the World Gold Council (WGC) paint a much more nuanced picture than the current bearish trend suggests. The correction in the price of gold and its worst quarter in the last ten years reflect very short-term dynamics, whereas the World Gold Council’s reports analyze the structural factors driving demand. These two time frames lead to different conclusions.
We can essentially identify five factors responsible for the correction:
• expectations of higher interest rates;
• rising real yields;
• a strengthening dollar;
• outflows from gold ETFs/ETCs;
• a shift of speculative capital toward AI, semiconductors, and SpaceX.
These factors are all consistent with financial theory. Historically, the price of gold has shown a negative correlation with real yields (or rates), the dollar, and the opportunity cost of capital (stock picking). The key question, however, is whether these factors are permanent or temporary.
The World Gold Council acknowledges that oil, inflation, and bond yields are exerting downward pressure on the price of gold. But it also notes a very interesting point: the correlation chart shows that oil is currently the main driver of bond yields.
The miners’ association interprets this as follows. If rising oil prices trigger new inflation, then fixed-income yields (and variable rates as well, we might add) will rise, initially causing gold prices to fall; but subsequently, investors might begin to doubt the sustainability of economic growth, at which point gold would once again become a sought-after asset.
Paradoxically, if rate hikes were to materialize, we might see one of the rare historical exceptions in which gold and interest rates rise together, because the market would interpret the hikes not as a sign of strength, but as a symptom of economic fragility.
Then there is the fundamental point of the whole issue: demand from central banks is not declining. Outflows from ETFs and ETCs, which are believed to be the main drivers of gold’s decline, are a temporary, volatile, and primarily tactical component—and, as such, represent only a portion of global demand. In contrast, central banks are now a much more stable and strategic buyer of the precious metal, especially considering that the volumes are staggering. Over the past four years, major central banks (as well as those in emerging markets) have purchased an average of 1,000 metric tons of gold per year, compared to an average of 500 metric tons in the previous decade. Thus, institutional demand is not slowing down; rather, it has doubled. Central banks’ expectations regarding their own gold purchases are even more striking. When surveyed by the WGC, 76 central banks provided extremely consistent projections:
• 89% believe that global gold reserves will increase over the next twelve months.
• 45% plan to directly increase their own reserves.
This is the highest figure ever recorded in the history of the survey (which, it’s worth noting, is conducted periodically). If market participants who purchase thousands of metric tons per year aren’t selling, it becomes difficult to sustain a structurally bearish thesis.
This key point immediately raises an important question: why are central banks still buying? The latest WGC report cites three main reasons:
1. protection during crises (90%);
2. store of value and hedge against inflation (84%);
3. portfolio diversification (83%).
So far, nothing new. But there is one new development—and a very interesting one at that: it concerns geopolitics as an additional motivating factor. Eighty-five percent of central banks in emerging markets view gold as a hedge against geopolitical risk, because gold is an asset that does not depend on any government, currency, or financial system. In a context of wars, economic sanctions, trade tensions, or deteriorating international relations, holding reserves in dollars or foreign government bonds can become riskier, as such assets may be frozen, restricted, or lose value. Physical gold, on the other hand, carries no counterparty risk, cannot be “printed” by a central bank, and, if held directly within the country, remains fully under the control of the monetary authority. For this reason, many emerging economies are increasing their gold reserves as a means of diversification and to safeguard their financial sovereignty. This is likely the most significant change in recent years, drawing a parallel with another asset that shares exactly the same characteristics and depreciation dynamics: can you guess which one?
The survey highlights another structural trend. Seventy-four percent of central banks expect the dollar’s share of global reserves to decline over the next five years. At the same time, 84% believe that gold’s share will increase. This is not a price forecast; it is a forecast of demand. And it is likely the most important factor, because gold—as it is worth remembering and reiterating—has no intrinsic value, and therefore it is impossible to say whether it is overvalued or undervalued: its dynamics are determined solely by supply and demand.
We can now draw a conclusion that we believe is of fundamental importance: today, there are two gold markets. The financial gold market, populated by ETFs, hedge funds, and retail investors, is highly sensitive—we might even say hypersensitive—to interest rates, the dollar, and sentiment (of all kinds). And as we know, sensitivity is synonymous with volatility. The second market, which we can define as “strategic,” consists of central banks, sovereign wealth funds, and governments—players that are far less sensitive to price but much more sensitive to geopolitics, sanctions, and reserve diversification. It is this second market that has supported prices in recent years.
So let’s return to the question posed in the title. For those who hold gold in their portfolios from a strategic perspective (which also includes diversification), selling solely because of the recent price correction does not make sense. The current weakness is driven by short-term macroeconomic factors (high real interest rates, a strong dollar, and outflows from ETFs), while the main structural drivers of demand—central bank purchases, diversification needs, and geopolitical risks—remain largely unchanged.
The conclusion most consistent with the data is to maintain exposure, possibly bringing it back to the target weight if the previous sharp rise had led to excessive concentration. Selling everything would mean giving up precisely the insurance function that central banks continue to seek.
For those who do not yet hold gold in their portfolios (but are there really any?), a distinction must be made. If the goal is to speculate on a rapid rebound following the correction, we have some bad news: there is insufficient evidence to assert that the low has already been reached. The World Gold Council points out that a further rise in yields and a still-strong dollar could prolong the period of weakness in the short term. And with that, we’ve also addressed those (and we believe there are many) who view gold as a tactical—and therefore speculative—investment: trade down prudently, but don’t expect big returns between now and the end of the year.
If, on the other hand, the goal is to build a long-term portfolio, the outlook is more favorable because you share the same objective as major institutional investors. And there’s another advantage as well. Since you don’t yet have any open positions, you can build an allocation at a favorable cost basis by entering the market gradually (for example, through periodic purchases—essentially an accumulation plan), thereby reducing the risk of entering at an unfavorable market moment.
To reach a fruitful conclusion, we believe that, given uncompromised demand factors, two responses are appropriate and sensible.
• For those who already hold gold in their portfolios. The available data do not justify selling based solely on the recent decline. It makes more sense to maintain an allocation consistent with one’s risk profile and rebalance only if the weight of gold has become excessive.
• For those who do not hold gold in their portfolios. The numbers do not indicate an urgent need to chase a rebound, but they do support the opportunity to gradually build a strategic position. The combination of persistent central bank purchases, a reduction in the dollar’s weight in reserves, and gold’s role as a hedge against geopolitical crises and inflation provides solid arguments for holding a portion of gold in a well-diversified portfolio, especially with a long-term horizon.
Disclaimer
This post reflects the personal opinions of the Custodia Wealth Management staff who authored it. It does not constitute investment advice or recommendations, nor does it constitute personalized advice, and should not be considered an invitation to trade in financial instruments.
