In times of market turmoil, investors typically flock to gold. However, the current financial climate has upended this traditional wisdom. The price of gold has fallen alongside risky assets, dropping 0.3% to trade at $4,033 an ounce. This unusual correlation has left investors with few places to hide as the cryptocurrency market sheds $1 trillion and global stock indices post their worst days in months.
The driving force behind this widespread sell-off is the outlook for US interest rates. Until recently, the market was pricing in a rate cut by the Federal Reserve for next month. Those expectations are fading rapidly. High interest rates are a double-edged sword: they hurt stock valuations by increasing borrowing costs, and they hurt gold because the metal offers no yield. When bonds offer attractive returns, holding gold becomes less enticing, leading to the current dip.
Simultaneously, fears of a tech bubble are causing a liquidation of assets. The “AI boom” is showing signs of fatigue, with leaders from Google and JP Morgan warning of irrational valuations. When investors panic, they often sell liquid assets to cover losses or meet margin calls. This liquidity crunch affects everything from Bitcoin, which is down 27%, to blue-chip stocks in the FTSE 100, to precious metals.
Despite the immediate gloom, commodity analysts see a silver lining for gold. Giovanni Staunovo of UBS believes the metal will bottom out soon. He argues that central banks are continuing to diversify their reserves by buying gold, which provides a floor for the price. Furthermore, he still anticipates the Fed will eventually cut rates, which would spark a recovery in bullion prices.
For the individual investor, the current landscape is challenging. The simultaneous drop in stocks, crypto, and gold suggests a “cash is king” moment. However, if the analyst predictions hold true, the dip in gold may be temporary, whereas the correction in the over-hyped tech and crypto sectors could be the start of a longer, more painful adjustment.