After gold prices plunge 20%, is a buying opportunity emerging? Wall Street: The logic of buying the dip remains intact

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Gold has recently undergone its most intense correction since years of bull markets, but some Wall Street institutions believe this is more like a phase-driven pullback due to interest rate expectations, rather than a reversal of its long-term logic. Against the backdrop of central banks continually increasing gold holdings, unresolved global geopolitical risks, and optimistic pricing for risk assets, gold still holds value as a hedging tool in investment portfolios.

Since the escalation of the conflict in the Middle East at the end of February, international gold prices have pulled back by about 22%. Although war, rising energy prices, and inflation pressure should theoretically benefit gold, the market has chosen to bet on the Fed potentially tightening policy further, pushing real interest rate expectations higher and thus suppressing the performance of interest-free assets like gold.

Nevertheless, gold has still risen about 21% in the past twelve months, performing slightly better than the S&P 500 Index over the same period. Meanwhile, US stocks have continued to rise during the war, with the market remaining optimistic about AI prospects and showing clear "desensitization" to geopolitical risks. Analysis suggests that in this "Goldilocks"-style risk appetite environment, gold’s long-term allocation logic has not weakened.

Why is the Gold Price Dropping Sharply? The Core is Still Real Interest Rate Expectations

The current gold correction revolves mainly around two trading themes in the market.

First is the strengthening expectation of Fed rate hikes. Giovanni Staunovo, Commodity Strategist at UBS Chief Investment Office, said that historically gold performs best during periods of declining real interest rates. Recently, market concerns about the Middle East boosting oil prices led to worries that the Fed might further raise rates to suppress inflation, keeping real interest rates high and putting pressure on gold.

The other market focus is rumors of some Middle Eastern central banks selling gold reserves. However, only Turkey has been confirmed so far. World Gold Council data show that Turkey’s central bank sold a total of 81 tons of gold in the first half of this year, worth about $10.6 billion at current prices. Apart from this, there is no further official evidence for other Middle Eastern central banks selling gold in large amounts.

The Fed Still Has Two Paths to Easing, Gold May Benefit Again

Although the market has factored in some rate hike expectations, the Fed’s future policy direction remains highly uncertain. According to the CME FedWatch tool, the market currently implies a roughly 50% chance of a rate hike in September.

The new Fed Chairman Kevin Warsh has so far not released a clear policy path, only emphasizing the maintenance of price stability, and has established several working groups to research inflation mechanisms and the impact of artificial intelligence on productivity. Relevant research results are expected to be published by year-end.

Analysts believe this means two scenarios remain favorable for gold in the future.

One, if the Fed responds too slowly to inflation shocks caused by energy prices, inflation may further spread, pushing real interest rates back down; two, a cooling AI investment cycle drags economic growth, prompting the Fed to turn dovish while oil prices remain high, and also likely to lower real interest rates. In either scenario, gold may regain support.

Central Banks Continue Buying Gold, Long-Term Demand Unchanged

Compared to short-term transactions, long-term support for gold still comes from continued central bank buying globally.

World Gold Council data show that since 2022, central banks have maintained gold purchases at historical highs. This reflects some countries’ intentions to reduce reliance on the dollar reserve system and global official departments reassessing geopolitical risk and financial sanctions risk.

Notably, the largest net buyer of gold in the first half of this year wasn’t Russia and similar countries, but Poland, which shows that gold reserve diversification has become a common choice among a wider range of central banks. Even if some Middle Eastern central banks sell gold to gain liquidity during a crisis, it does not mean gold’s value is declining. In fact, it proves that gold still serves as an important reserve asset in extreme situations.

Under Optimistic AI Expectations, Gold Remains an Important “Insurance” in Portfolios

The biggest contradiction in today’s market is the very different expectations reflected by risk assets and safe haven assets.

On one hand, US stocks continue to hit new highs amid conflict, AI remains the strongest theme, and investors are exceptionally optimistic toward geopolitical risks. On the other hand, gold has experienced a sharp correction with a clearly reduced safe-haven premium. The Wall Street Journal analysis suggests that when stocks are mostly priced for “everything will go smoothly,” gold’s value as a tail risk hedge tool becomes even more pronounced.

For long-term investors, this correction does not necessarily mean the end of the gold bull market, but could instead be a valuation adjustment caused by shifting interest rate expectations. With global central banks continuing to buy gold, policy path uncertainty, and persistent geopolitical risks, the core logic of buying gold on dips remains intact.

Risk Warning and DisclaimerThe market involves risks; investments require caution. This article does not constitute personal investment advice, nor does it take into account the individual investment objectives, financial situation, or needs of users. Users should consider whether any opinions, views, or conclusions herein are suitable for their specific circumstances. Investing based on this article is at your own risk. ```