Gold’s growth over the last year has been driven by a ‘perfect storm’ of tailwinds: persistent inflation, central bank buying, geopolitical uncertainty, concerns over government debt and Trump’s tariffs.
Stockspot has held a meaningful allocation to gold for over a decade. The reasons I shared back in 2019 for owning gold are still just as relevant today. Gold plays a key role as a diversifier, an insurance policy, and a safe haven. Unlike many gold advocates, I have no ties to the gold industry… but I see its importance in diversified portfolios, especially for Australian investors, superannuation and self-managed super funds.
But for the first time in 10 years, sentiment feels overwhelmingly bullish. With U.S. tech shares struggling, gold stands as the only major bull market left, attracting a surge of investors seeking safety. When sentiment becomes this one-sided, history suggests volatility isn’t far behind.
At some point this year there’s a good chance of a sharp correction (potentially 15-25%). This isn’t because gold’s long-term case has weakened, but because it has become a crowded trade. After more than doubling since 2022 with only shallow pullbacks, many investors who are hiding in gold will be unprepared for a deeper drawdown.
Why gold could pullback
I can see five potential catalysts could lead to a dip in the gold price this year:
- A de-escalation of geopolitical tensions: Wars in Ukraine and the Middle East, combined with Trump’s trade wars have driven safe-haven demand. If diplomatic breakthroughs occur on any of these fronts, some of gold’s risk premium could unwind.
- Higher-for-longer interest rates: Gold has historically moved inversely to real interest rates, rising when yields fall. However, over the past 18 months, gold has decoupled from this relationship, rallying even as real rates remained elevated. If this relationship recouples, higher real yields could put downward pressure on gold.
- A return to market stability: Gold’s strength has been partly due to economic slowdown fears and stock market volatility. If at some point risk appetite improves, even temporarily, investors may rotate out of gold and back into risky assets like shares.
- Silver and gold stocks are lagging: Typically gold miners and silver rise at a multiple of gold’s price. Yet they’ve failed to keep pace, suggesting internal weakness.
- Gold’s new high in USD hasn’t been confirmed in other currencies: Even though gold hit a new high of US$3,050, it has not hit a new high in Euros. This kind of divergence is often an early technical warning of a market top.
A crowded trade and contrarian signals
One of the strongest signals for a pullback is how popular the gold trade has become this year. Investment banks, which tend to lag markets, have dramatically raised price targets. Macquarie now sees US$3,500, Citigroup expects US$3,300 while Goldman Sachs expects US$3,100 by year-end. Another sign of froth is how institutional investors are reacting. After years of ignoring gold, consultants to the country’s largest super funds are now scrambling to address their underweights. These kinds of late-cycle bullish calls have historically marked short-term tops as there are fewer buyers left to push prices higher in the near term.
Why diversified investors shouldn’t mind
For long-term investors, a correction in gold shouldn’t be a concern. At Stockspot we’ve held a strategic allocation to gold since 2014, increasing it to 14.8% in early 2021. That decision has paid off, with gold outperforming bonds by 90% since 2021 and providing strong diversification benefits. Even if gold falls 25% it would still be significantly higher than even one year ago.
Importantly, gold’s fundamental appeal hasn’t changed:
- As a hedge against government debt and inflation. Global debt levels are unsustainable, and central banks will likely continue prioritising financial stability over inflation control. Unlike shares and bonds, which can move together in inflation shocks, gold provides genuine portfolio protection.
- Central banks are still buying. They’ve been record buyers of gold, shifting away from U.S. Treasuries. This trend is unlikely to slow down.
The right mindset for gold investors
Gold should be seen as a long-term allocation rather than a short-term trade. Over the past year many investors have only experienced shallow pullbacks, fostering a sense of complacency. A sharper correction would be a healthy reminder that even in a strong bull market, gold doesn’t move in a straight line.
If you missed the rally and don’t have much gold in your portfolio, any decent dip this year could be a good chance to add a more meaningful allocation.
This article was originally published in The Australian on March 22 2025: Why gold could drop 25 per cent.
