Has the Worst Passed for Gold? Wells Fargo: Risk-Reward Ratio Has Reversed, $500 Downside for $1,500 Upside Potential

Sameer Samana, Head of Global Equity and Physical Asset Strategy at Wells Fargo, believes that after a pullback of over 20% from historical highs in January, the risk-reward profile for gold has shifted: downside potential is narrowing, while the long-term upside remains attractive.

In an interview with Kitco News, Samana stated that investors should currently reduce their focus on short-term volatility and instead assess gold's long-term risk-reward characteristics. He believes that whether oil prices remain elevated or the Federal Reserve eventually implements further rate hikes, most of these major risks have already been priced into gold.

He said, "I think since the peak, there's been quite a reversal in the risk-reward ratio." Regarding how the market has digested rate hike expectations, he further added, "If the federal funds futures market has already priced in two to three rate hikes, then I think gold has also accounted for two to three rate hikes."

From his perspective, what investors really need to discuss next is not the concern about more rate hikes, but the probability of even higher levels of tightening. He said, "How likely are we to see more than two to three rate hikes? Inflation isn't severe enough to warrant significantly more aggressive tightening."

In recent months, gold has remained under pressure as renewed tensions in the Middle East have pushed up oil prices, which in turn have strengthened market bets that the Federal Reserve will be forced to tighten policy. Rising real yields have also increased the opportunity cost of holding non-yielding assets like gold.

However, Samana believes that market sentiment may have become excessively pessimistic. He said, "The real question is whether, for this allocation that is difficult to replicate with other assets in your portfolio, the risk-reward ratio is favorable. I believe it is."

Short-Term Downside Still Possible, Long-Term Cycle Intact

Samana did not deny that gold could continue to weaken in the short term. From a technical perspective, he noted, it's still difficult to confirm that gold has bottomed.

He said, "It's hard to say gold has bottomed." As for short-term risks, he further pointed out: "In the short term, I think we could face downside risk toward $3,500."

Besides the downside risk, he also mentioned the existence of resistance in the upper ranges. In his view, technical resistance could emerge in the $4,500 to $4,900 range, as investors who bought at previous highs may choose to stop out if prices recover.

Nevertheless, Samana emphasized that investors should not overlook the longer macroeconomic cycle. He said, "Once the dust settles, you return to roughly the same scenario." In his logic, rising oil prices and higher rates slow the economy, eventually driving central banks and fiscal authorities to reinstate supportive measures.

He further said that such an eventual economic slowdown is likely to prompt policymakers to cut interest rates again and possibly introduce additional monetary support. On this basis, he believes the long-term trend for gold remains intact.

He said, "Can you see a scenario where it hits $3,500 first and then $4,500? It's possible." But he also emphasized, "But unless you think that long-term cycle is over, a rally in gold is really just a matter of time."

Wells Fargo Remains Bullish on Gold’s Long-Term Prospects, Calls It a Portfolio Hedge

Samana also explained his view on gold from an asset allocation perspective. He noted that historically, gold tends to be relatively resilient during economic downturns.

Looking back at recent economic recessions and periods of rapid monetary tightening, he stated that gold typically posts milder drawdowns compared to many other asset classes. According to him, during the 2020 recession and the Federal Reserve’s 2018 tightening cycle, gold pulled back about 15%; during the 2008 financial crisis, it fell close to 34%. More importantly, gold’s long-term bear markets tend to play out gradually over years rather than collapsing suddenly.

With gold already down nearly 30% from its highs, Samana believes much of the potential loss is already reflected in prices. He said: "I think a lot of the pain is already priced in."

He also said that gold still deserves a place in portfolios because it can offer diversification benefits outside of traditional assets, and is especially valuable when both stocks and bonds are under pressure. "This asset doesn't work in every environment," he said. But he added, "But when equities don't work and bonds don't work, the chances of gold coming through go way up."

Samana's view is also in line with the latest research from the Wells Fargo Investment Institute. In its recent "Chart of the Week" report, the Institute said the recent pullback in gold prices was mainly driven by profit taking and the market’s increased expectations of Fed tightening; higher real yields have temporarily dimmed gold’s relative appeal. However, the Institute expects this relationship to stabilize if energy and supply chain pressures start to ease.

The report further noted that the structural factors supporting gold remain solid, including ongoing central bank buying, the need for diversified reserves, and persistent geopolitical uncertainty. On this basis, Wells Fargo reiterated its long-term forecast: by the end of 2026, gold prices are expected to rise to $5,300–$5,500 per ounce; by the end of 2027, prices are expected to further climb to $5,800–$6,000 per ounce.

In Samana's view, these long-term targets are precisely why investors should not focus solely on the current pullback. He said, "If you can look 18 months out to the end of 2027, I still think the possibility of regaining the old highs, or even making new ones, is very real."

On the current risk-reward for allocating to gold, he gave a very direct assessment: “So you’re giving me $500 of downside and about $1,500 of upside. As a portfolio builder, I think that’s a very attractive risk-reward profile.”

As of now, after two weeks of consecutive declines, spot gold is showing signs of support at the key psychological level of $4,000 due to buying on dips.

Amy Gower and other Morgan Stanley analysts wrote in a report that "gold is struggling to find direction," with central bank purchases supporting gold prices, while exchange-traded funds (ETFs) sold off in response to Fed rate hike concerns. However, they believe ETFs have room to re-enter the market, as the Fed is expected to ultimately stay on hold this year and resume rate cuts next year.