Has the gold price hit rock bottom? Institutions warn that the cyclical bottom is approaching

Gold has recently experienced a significant correction, ending its multi-year upward trend and prompting the market to reassess the investment logic behind gold. However, analysts believe that the short-term decline has not changed gold’s long-term value as a safe-haven asset, and the current pullback may instead present an opportunity for repositioning.

Since the outbreak of war in Iran on February 28, the price of gold has fallen by 22% in total. This trend deviates from traditional safe-haven logic, as geopolitical conflicts usually drive investors to buy gold to hedge against inflation and uncertainty risks.

Giovanni Staunovo, commodity strategist at UBS Wealth Management, stated that the market may be betting that the Federal Reserve will raise rates due to rising inflationary pressure, and since gold does not generate yield, its appeal diminishes in a rising real interest rate environment.

Additionally, there were prior rumors that some Middle Eastern central banks sold gold during the conflict to obtain cash, but only the Turkish Central Bank’s transactions have been confirmed so far. Data from the World Gold Council shows that the Central Bank of Turkey sold 81 tons of gold in the first half of this year, equivalent to about $10.6 billion at current prices.

Nevertheless, from a longer-term perspective, gold’s performance remains robust. Over the past twelve months, gold prices have increased by about 21%, slightly higher than the S&P 500 index’s gains. Analysts believe that the recent pullback has not weakened gold’s role as a risk-hedging asset.

Central bank gold buying trend still offers support

Global central banks continuously increasing their gold reserves is a key factor supporting gold’s long-term demand.

According to the World Gold Council, since the outbreak of the Russia-Ukraine war in 2022, global central bank gold purchases have increased significantly. Some countries hope to reduce their reliance on the US dollar system and minimize potential financial sanction risks by boosting gold reserves.

This trend is not limited to Russia, China, and similar countries. In the first half of this year, Poland was the world’s largest net gold buyer, indicating that more economies are leveraging gold to secure their assets.

Meanwhile, there remains considerable uncertainty regarding the Federal Reserve’s future policy path.

Although rising oil prices may add inflationary pressure, it is still unclear whether the Federal Reserve will respond by raising rates. According to the CME FedWatch Tool, the market currently estimates the probability of a rate hike by the Fed in September at around 50%.

New Federal Reserve Chairman Kevin Warsh has so far focused mainly on maintaining price stability, but has not provided further policy direction. The Fed has set up multiple task forces to study factors affecting inflation and the impact of AI on productivity, with results likely to be released by the end of the year.

It is noteworthy that should the Fed fail to respond adequately to rising oil prices, inflation pressures may further accumulate; if AI investment slows down, the Fed may turn dovish. In either case, declining real interest rates could again support gold prices.

Technical indicators show gold is approaching a bottom area

Paul Wong, Managing Partner and Market Strategist at Sprott Inc., believes that gold is currently in an obviously oversold state and may form a cyclical bottom before September.

Wong stated that, in the past, gold would usually find support when its price approached around 90% of the 200-day moving average, and the current drop has already exceeded this level.

He said that multiple technical indicators point to gold being in an extremely oversold region, and resistance to further declines is building. Wong stated:

“This does not mean the market has bottomed, but it suggests most of the selling pressure may have already been released.”

He noted that bullish positions in the gold futures market are now at the lowest levels since 2018. Meanwhile, ETF gold holdings have decreased somewhat but have not seen mass outflows. As selling pressure recedes, investors may begin seeking new entry opportunities.

Seasonally, gold typically sees a phase low in summer, most often around early August. Wong believes gold could again see a catalytic rebound in a similar time window this year, triggered by factors such as Federal Reserve policy changes, developments in the Middle East, or bond market volatility.

Bond market pressures may drive gold higher

Wong believes the key to gold’s future trajectory still lies in the bond market. He pointed out that bond yields in major economies such as the US, Germany, and Japan are all under upward pressure, with the global bond market signaling rising risks. If markets sense that policymakers are trying to maintain low rates via measures such as changing inflation targeting rules, the bond market could react strongly.

US fiscal pressure is also an important component of gold’s long-term logic. Wong stated that US government debt now stands at $39.5 trillion, up about $3.8 trillion or nearly 10% over the past year. Meanwhile, US interest payments have surpassed military spending.

He believes the global economy is entering a phase of de-globalization, with countries stepping up supply chain construction, energy stockpiling, and critical metal reserves, which will further push up long-term costs.

In Wong’s view, the Federal Reserve’s policy options are limited in the face of these structural pressures. “What can the Fed do? Not much,” he said. Ultimately, central banks will have to choose between maintaining bond market stability and preserving currency value.

Wong believes that, in the long run, currency depreciation may become a major means of alleviating high debt pressures, and gold will benefit from this trend.

He pointed out that gold’s rise is not because the market is chasing a new hot theme, but rather because the global fiat currency regime is facing ongoing depreciation pressure. With growing pressure from inflation, debt, and fiscal deficits, gold is likely to remain an important asset for investors seeking to hedge risks.