Why gold price could drop 25pc

Gold is due a pullback, but long-term investors should stay the course, even a 25pc reversal would only bring it back to where it was a year ago.

Gold is due a pullback — which is fine for people who hold gold and good for potential buyers. Picture: Alamy

Gold has had an extraordinary run. In just over a year it has surged from $US2000 to more than $US3000 per ounce, driven by a perfect storm of tailwinds: persistent inflation, central bank buying, geopolitical uncertainty, concerns over government debt and Trump’s tariffs.

For retail investors, 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 and self-managed super funds.

For the first time in 10 years, retail sentiment feels overwhelmingly bullish. With US 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 I expect a sharp 15 to 25 per cent correction. 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. In short, the latecomers who have recently jumped onto the gold bandwagon need to be shaken out before the bull run can continue.

Why gold could retreat

I can see five potential catalysts which could lead to a pullback in gold this year:

1. 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.

2. 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.

3. 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.

4. 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.

5. Gold’s new high in USD hasn’t been confirmed in other currencies. Even though gold hit a new high of $US3040, it has not hit a new high in British pounds, Swiss francs, Yen, or 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 sees US$3500, while Goldman Sachs expects US$3100 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. Even if gold falls 25 per cent 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 US 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.

For those who missed the rally and have little or no gold exposure, any meaningful dip this year should be seen as an opportunity to rethink allocations.

Chris Brycki is founder and CEO of Stockspot the online investment advice group.