The price of gold fell 8.1% from a high of $4,381.60 on 20 October to as low as $4,025.07 a week later.
The slide in gold prices was particularly steep on 21 October when the price of gold closed 5.3% lower than previous day’s level.
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“Commentators were quick to call the top [of the gold price rally] and suggest a similarity with 2011, where gold peaked in September and began a long decline of over 40%,” said James Luke, senior portfolio manager, gold and commodities at Schroders.
Luke attributed the sharp correction on the day to an easing of a silver supply crunch that has calmed precious metals markets as well as a natural correction following a particularly sharp rise in gold prices since late August. The US government shutdown also limits the amount of information that is available for investors to base decisions on, though this has previously acted to boost gold prices.
But Luke doesn’t think the gold price rally is over just yet.
“The market has experienced a natural correction within a multi-year bull market,” he said, adding that the current bull run was incomparable with previous gold markets “in terms of the breadth and depth of potential monetary demand”.
Why have gold prices fallen?
Several catalysts appear to have prompted the turnaround in gold price movements.
After such a prolonged period of gains, many gold investors have taken the opportunity to bank some profit, and this appears to have been triggered by an unravelling of some of the sources of uncertainty that had previously driven gold prices higher.
“The political news flow has recently turned more benign,” said Claudio Wewel, FX strategist at J. Safra Sarasin Sustainable Asset Management. Wewel highlighted the possibility of a US-China trade deal, and the potential for US president Donald Trump to walk away from some tariffs.
“This has spurred a moderate risk-on movement in equities markets, reducing demand for safe havens,” said Wewel.
India is one of the world’s largest markets for physical gold. The demand for gold in India, particularly around Diwali celebrations, significantly impacts global gold prices. The five-day festival ended on Thursday 23 October, with Indians spending an estimated $8-11 billion on gold, according to India Bullion and Jewellers Association and All India Gem and Jewellery Domestic Council.
“Indian demand, having been strong in the run up to Diwali, has now reportedly eased off with the end of the festival,” said Luke.
Gold’s sudden decline last week “highlights how far prices had diverged from their macro anchors of real yields and inflation expectations,” said Lale Akoner, global market analyst at eToro. “Historically, when both equities and gold sit in the 90th percentile of six-month performance, momentum in gold has tended to fade within the following quarter while equities continue their gains.”
Is the gold rally over?
Gold prices are currently hovering just above the $4,000 mark, around 53.8% above where they started the year.
It is unclear whether gold will be able to maintain this level, or even go on to post further gains in the near future.
Detractors will point to previous markets, such as 2011, when gold prices fell dramatically once price momentum reversed as it appears to have over recent days.
But advocates believe the investment case for gold remains broadly intact.
“Geopolitical uncertainties remain very elevated, which is underscored by the cancellation of the Trump-Putin meeting in Budapest,” said Wewel. “Institutional purchases should remain another key factor and should provide a floor to the gold price, as central banks seek to diversify their reserves away from dollar assets and are likely to buy into dips opportunistically.”
Luke highlights that emerging market central banks, which have been major drivers of the de-dollarisation trend that has driven much of the recent gold rally, are currently at around 12%, compared to over 45% for developed market counterparts. “Surveys continue to suggest [central bank] demand is broadening, and we expect significant buying support if prices fall,” said Luke.
Akoner, though, thinks the macro backdrop is less promising for gold. “Central bank buying provides a structural floor, but speculative inflows have pushed valuations far beyond models, based on inflation and rates,” she said. “Unless macro conditions deteriorate materially, the balance of probabilities suggests continued consolidation ahead, solidifying a transition from fear-driven to valuation-driven pricing.”
How to gain exposure to gold prices
There are three main ways to invest in gold. The first one is investing in the metal itself through a financial contract, such as an exchange-traded fund (ETF) or exchange-traded commodity (ETC).
Investments into these kinds of products are another factor helping to support gold prices this year.
“European investors are getting involved, having added over $6.5 billion to gold ETCs this year alone, reversing the outflows of 2024,” says Tom Bailey, head of research at HANetf.
See our article on the best gold ETFs for more information.
You can also get indirect exposure by investing in the miners that dig gold out of the ground. This can be done by investing directly in their shares, or by buying a gold fund or investment trust.
While gold miners don’t always rise with the gold price, as other company-specific factors are at play, they have “stolen the show so far” this year, says Bailey.
“Whereas physical gold outperformed miners by a wide margin in 2024, this year gold miners have produced a return almost three times higher,” Bailey adds.
Lastly, you can buy physical gold bars or gold coins.
In terms of how much gold to hold in a portfolio, Tom Stevenson, investment director at Fidelity International, suggests around 5-10% is a good amount – which is about the same as you might hold in cash.
“The two offer insurance and dry powder to complement the growth and stability of the shares and bonds that make up the bulk of a balanced portfolio,” he comments.
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