Here’s Why Gold is Down, and Where it Goes Next

What Happened?

Since Monday, November 4^th (the day before election day) three of the most popular investing assets have had differing fortunes.

Stock prices, as measured by the S&P 500 are up 4.1%.

The price of Bitcoin has gained a stunning 31%.

Meanwhile, the asset that had been among the best performers over the previous 12 months, is down 5.2%.

That asset? It’s gold.

So why has it performed so poorly?

Why it Matters

The common reason many give for buying gold is that it’s a ‘hedge against inflation’.

Over the long term, that’s a fair assessment. But in the short and medium term, gold has had a habit of disappointing inflation-hedging investors.

For instance, from early 2012 through to 2018, the gold price fell over 30%. This was at the same time central banks around the world were still printing and borrowing billions (even trillions) of dollars.

Again, from April 2021 when the CPI was 4.2% through to December 2021 when inflation hit 7%, the gold price fell from over $2,000 to as low as $1,650. Yes, the gold price bounced from there afterwards, but it was hard a ‘hedge against inflation’ during those previous periods.

But from early 2023 the gold price really took off. Government spending continued to rise, as did debt levels, and there really appeared to be little chance or appetite for governments to stop spending.

Over the long term — investors thought — spending, debt, and inflation are only set to go higher. But with the recent presidential election result, and talk about the new administration abolishing departments and cutting spending from 2025, the certainty of more spending, more debt, and higher inflation no longer seems as certain.

But despite that, it seems there is still a reason to be bullish on gold, if you ask investment bank, Goldman Sachs…

How it Affects You

According to Goldman Sachs’ commodity team, gold could be one of the top commodity trades for 2025 — setting a target of $3,000 for the end of 2025.

If that happens, it would represent a 15% increase on today’s price.

So why the positive outlook?

Two reasons. First is that foreign central banks have been buying gold. Data from the World Gold Council reveals that so far this year, central banks have bought a total of 765 tons of gold. The largest buyer was the National Bank of Poland, with 46 tons.

Second is the belief that as the Federal Reserve continues to cut interest rates, more money will flow into physical gold and into gold exchange-traded funds (ETFs). The reasoning here is that if interest rates are lower, gold is better able to compete for investor funds, as gold doesn’t pay interest or dividends.

Bottom line, the gold price is down over $200 (8%) from its recent high. If Goldman Sachs is right, the current weakness could be a great time to buy.