Gold has experienced a remarkable surge this year, rising 54% year-to-date, positioning it for its largest annual gain since 1979. The precious metal has surpassed a series of key psychological resistance levels, breaking through $3,000 in March and $4,000 in October.
Driving Forces Behind Gold's Rally
This surge is largely attributed to escalating global political tensions and uncertainties surrounding U.S. trade policies. These factors have collectively triggered a fresh wave of "fear of missing out" (FOMO) buying. According to Richard Reed, Chief Market Strategist at the World Gold Council, the nature of the rally has shifted, now being driven by Western investors, in contrast to the more stable emerging market buyers who were the driving force for most of the past two years. This implies greater volatility and uncertainty, even though the factors driving gold appear to be enduring.
Exceeding Expectations: Hitting New Record Highs
On Monday, gold hit a record high of $4,381 per ounce, a level few predicted a year ago. Notably, attendees at the London Bullion Market Association (LBMA) conference held a year ago in Japan had forecast a price of only $2,941 by this time. After achieving so many significant milestones, gold prices fell 5% on Tuesday, marking their steepest single-day decline in five years. The Relative Strength Index (RSI), which measures the magnitude of price changes, also dropped from "overbought" territory to a "normal" position for the first time in seven weeks.
Healthy Correction or Beginning of the End?
Julius Baer analyst Carsten Menke believes that this correction is natural and healthy after such a sharp rise. He asserts that the fundamental backdrop for gold remains favorable. It's worth noting that gold has risen 20% since the Federal Reserve signaled interest rate cuts in September. According to analysts at Oxford Economics, this performance exceeds gold's performance in recent easing cycles by the U.S. central bank.
Concerns About a Bubble in Financial Markets
MKS PAMP head of metals strategy Nicky Shiels points out that the Federal Reserve would not cut interest rates in previous cycles while the U.S. stock market was hitting record highs, talk of a market bubble was circulating, and inflation was still significantly above target. She believes that this "everything bubble" has more room to run, and that gold surpassing $4,500 will only perpetuate retail FOMO buying.
Surpassing Inflation-Adjusted Highs
In the past two years, gold has doubled in price and surpassed its inflation-adjusted all-time high from 1980 of $3,590 (when the nominal high was $850), according to MKS PAMP calculations.
Caution Regarding the S&P 500 Surge
Market experts are closely monitoring the surge in the S&P 500 and the simultaneous flow of investor money into gold. They point out that significant corrections in the stock market have historically forced the selling of safe-haven assets, including gold.
Impact of Central Banks and Institutional Investors
With the exponential gains that gold has seen in the last month, emerging market central banks do not need to do much to continue advancing their common goal of increasing the share of gold in their foreign exchange reserves for diversification. While central bank purchases are expected to remain high in the coming years, supporting demand for gold, rising prices automatically increase the value of their holdings.
Potential Challenges in the Future
Shiels cautions that this idea also applies to long-term institutional investors, who may be reaching their portfolio thresholds and need to de-risk and reduce their gold holdings. Analysts also warn that if investor momentum slows in 2026, excess physical supply could begin to pressure prices, as demand from the jewelry sector in key consuming regions declines. According to trade monitoring data, India's imports fell 25% from January to July.
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