Gold’s 28% correction is painful, but history suggests the bull market isn't over
The gold market is struggling to hold support at $4,000 an ounce, and although this has been a critical level of focus in recent weeks, analysts say that the current bear-market correction should not signal the end of the long-term bull market.
The yellow metal is struggling on Wednesday as the U.S. dollar index has rallied to its highest level in more than a year. Spot gold last traded at $3,980.20 an ounce, down more than 3% on the day.
The U.S. dollar is seeing surging momentum as markets begin to aggressively price in rate hikes while the Federal Reserve signals a focus on keeping inflation pressures under control. According to the CME FedWatch Tool, markets are pricing in a rate hike as early as September, with further potential tightening in December.
However, in a note to Kitco News, Paul Williams, Managing Director at Solomon Global, said that investors need to put gold’s current price action into perspective. He explained that gold’s nearly 30% drop from its record highs in January is not uncommon compared to previous bullish cycles.
“During the 1970s, gold fell by around 45% between its mid-decade highs and 1976 lows before surging to record levels in 1980. During the 2008 financial crisis, it declined by roughly 30% before recovering strongly and reaching record highs in 2011,” he said. “These episodes demonstrate that sharp corrections have often been part of the journey for long-term gold investors, and the question they need to ask is whether the fundamental reasons for owning gold have materially changed. In my view, they have not.”
Although gold has seen a drastic selloff as markets focus on rising opportunity costs and the Federal Reserve signals its willingness to raise interest rates, Williams also pointed out that gold prices are still up from where they were last year.
“Even at this level, gold is up almost 20% over the past 12 months,” he said. “The drivers that have supported gold in recent years, such as central bank buying, geopolitical uncertainty, and elevated sovereign debt levels, have not disappeared overnight. Short-term price moves are often driven by factors such as profit-taking, shifts in interest rate expectations, and currency strength, rather than by a fundamental change in gold's long-term investment case.”
Despite remaining long-term gold bulls, analysts are also warning investors to brace for potentially lower prices. Some analysts have said that gold could fall back to $3,700 an ounce.
