Gold strength is likely intact, even with volatility

[SINGAPORE] Just when you are lulled into thinking gold’s trajectory is unstoppable, its price suddenly plunged by more than 6 per cent on Tuesday (Oct 21), its steepest drop in more than a decade.

Various reasons have been proffered for this, such as a recent rebound in the US dollar; a more positive tone to US-China tensions; and possibly India’s shutdown for Deepavali which is thought to have drained the market of liquidity.

There is, to be sure, yet another explanation. Gold has climbed an estimated 25 per cent in the past two months alone. Year to date, until the year’s high of US$4,359 per ounce on Oct 20, it has shot up by an eye-popping 65 per cent. Clearly, especially for investors in liquid gold-backed exchange-traded funds (ETF), it was opportune to take some profits.

Forecasts for gold remain robust. Bank of Singapore, for instance, upgraded its 12-month expectation for the precious metal to reach US$4,600. That is tame in comparison to some other forecasts. Societe Generale reportedly expects gold to touch US$5,000 by end-2026, and Goldman Sachs has it at US$4,900.

By now the underpinnings of gold price strength are well known. One, central banks remain stalwart buyers. Based on the World Gold Council’s Central Bank Gold Reserve Survey for 2025, a record 95 per cent of respondents expect gold’s share of reserves to continue to increase over the next 12 months, compared to 52 per cent in 2021. Over a five-year period, 76 per cent expect gold holdings to rise further, and 73 per cent believe the US dollar’s share of reserves will fall.

Two, gold’s status as a risk-off asset and a viable alternative to fiat currency has been burnished by the expected structural decline of the US dollar. Year to date, the US Dollar Index has fallen by nearly 9 per cent, thanks to Trump administration policies that are perceived to undermine the US economy and inflate US debt.

US fiscal profligacy, as exemplified by the One Big Beautiful Bill, is expected to add trillions of US dollars to federal deficits, with negative implications for US bonds and the greenback.

Put together, the net effect is an undermining of investor confidence in US assets.

But by far one of the strongest arguments for gold’s staying power is its place as a diversifier in portfolios. Just a decade ago, gold was hardly mentioned in bank commentaries, much less thought of as a strategic asset because it does not pay a yield and has historically suffered long fallow periods.

But heightened geopolitical concerns, inflation risks, volatility and elevated correlations between public stocks and bonds have intensified the search for uncorrelated assets and cast a new light on gold.

As a diversifier, gold is by far easier to access, more liquid and transparent than private market assets. There are, of course, caveats. In so-called “risk-on” periods, gold may rise along with equities. Volatility is also exacerbated by sharp ETF flows.

The prudent path is to refrain from chasing gold’s price action, and instead keep a modest allocation as a strategic holding in portfolios.