The price of gold is set to record its most significant quarterly decline in over a decade, as the allure of the precious metal diminishes for retail investors. This downturn comes amidst growing anticipation of interest rate hikes in the United States, a stark contrast to the continuous record-breaking prices observed last year. The metal's value has fallen below $4,000 per troy ounce this week, reaching as low as $3,942.9 on Tuesday – its lowest point since November.
This substantial drop represents a 14 per cent decline in the second quarter alone, marking gold's worst quarterly performance since 2013. This is a considerable departure from its near-record high of $5,595 recorded in January. The shift in investor sentiment is largely driven by speculation that Federal Reserve Chair Kevin Warsh may signal a move towards increasing interest rates this year. Gold typically performs less well during periods of high borrowing costs because it is a non-yielding asset, meaning it does not generate income for holders.
As interest rates rise, alternative assets such as bonds become more appealing, as they offer higher yields and the potential for greater returns. Susannah Streeter, chief investment strategist at Wealth Club, noted that gold has "lost yet more of its lustre" as investors are drawn to these more lucrative options. Robust US economic data, including strong jobs figures and persistent inflation, have solidified expectations that the Federal Reserve will likely maintain higher interest rates for longer, thereby boosting Treasury yields and the dollar, which further dampens gold's appeal.
The two-year rally in gold, which began amidst geopolitical tensions, has started to unwind. The conflict in the Middle East, which initially drove up oil prices and fuelled inflation and interest rate expectations, subsequently led many investors to reduce their gold holdings and realise profits. Data from the World Gold Council indicates significant net outflows from Gold Exchange-Traded Funds (ETFs), with May seeing $2bn in outflows, a trend expected to continue into June, with outflows reaching $4.7bn in the week ending 26 June.
Beyond the Federal Reserve's influence, investors are also redirecting capital from gold into high-growth sectors, particularly leading AI and tech stocks, as well as significant initial public offerings such as SpaceX. Analysts foresee this "AI euphoria" continuing to impact the gold market, especially with anticipated public listings from companies like OpenAI and Anthropic. Industry experts are now questioning gold's potential to return to its previous highs, with the World Gold Council suggesting that a fresh geopolitical shock or a reversal in interest rate expectations would be necessary to trigger another market boom.
Despite the cooling interest from retail investors, central banks globally are largely maintaining their gold reserves, though the pace of their purchases is under scrutiny. The World Gold Council's report indicates that while more central banks are entering the market, this does not necessarily equate to a significant increase in the volume of their gold acquisitions. Expected headwinds, including a strengthening US dollar and shifts in investor risk sentiment, are likely to exert further downward pressure on gold prices through the latter half of the year.