Gold: Still Worth Buying Despite Volatility?

Since early November, the price of gold has witnessed unprecedented volatility, with a remarkable three-week stretch where the international gold price fluctuated significantly. On November 25, COMEX gold futures plummeted by 3.16%, closing at $2,626.4 per ounce, after hitting an intraday high of $2,723 per ounce. The drop represents a staggering nearly $100 loss in a single day, marking the largest daily decline since June 7. In the days following this tumultuous decline, gold prices rebounded once again, leaving investors who purchased gold feeling somewhat disoriented. The key question lingering on everyone’s mind is: why is gold exhibiting more volatility than the stock market? What exactly is happening in the global economic landscape?

Experts analyzing the sharp decline on Monday suggest that it was prompted by a combination of factors. Initially, geopolitical tensions had earlier driven the prices of gold upward. However, in the aftermath, there appeared to lack sufficient upward momentum to sustain those high prices. The dramatic plunge on November 25 could be attributed to investors cashing in their profits ahead of the Thanksgiving holiday, alongside traders reassessing their expectations regarding the Federal Reserve’s future interest rate cuts.

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Thereafter, starting Tuesday, the price of gold regained strength for three consecutive days, largely fueled by heightened expectations surrounding potential interest rate cuts in December. As we delve deeper, examining relevant U.S. economic data reveals a basis for those expectations of a potential rate cut.

On November 27, it was reported that the Federal Reserve's preferred core inflation indicator showed an annual acceleration for October, rebounding to its highest point since April. This development provides insight into why policymakers have exercised caution regarding potential rate cuts. Economic analysts pointed out that despite the growth rate showing signs of moderation, the U.S. economy has achieved a growth rate exceeding 2% in eight out of the last nine quarters, illustrating the persistent resilience of the American economy.

Government reports also affirmed that the U.S. GDP for the third quarter remained unrevised at a growth rate of 2.8%, propelled by robust consumer and business spending. Furthermore, durable goods orders in October recorded a monthly increase of 0.2%, falling short of expectations set at 0.5% but an improvement over the previous month’s decline of 0.4%. In conjunction, while the year-over-year PCE price index for October surged from previous readings of 2.1% to 2.3%, these indicators highlight the fundamentals supporting a sustained but cautious economic environment.

Inflationary pressures appear to be building again, raising challenges against the backdrop of the Federal Reserve's forthcoming meeting minutes that indicate a continued inclination toward interest rate cuts. Market forecasts based on Federal Reserve observations suggested a 66.5% probability of a 25 basis point rate cut in December.

Moreover, statements emerging from the Federal Open Market Committee meeting showed a commitment to a gradual reduction in interest rates. During the November 26 meeting, officials expressed growing confidence that inflation was easing and that the labor market remained robust, albeit highlighting that the path to rate cuts would be measured and incremental. Notably, a marked increase in the use of specific terminologies like “gradual” was observed when discussing future rate adjustments when compared to the previous meeting’s minutes in September.

Regarding the potential for rate cuts, several officials asserted that if inflation could be maintained at 2% while the economy remained near maximum employment levels, it would be reasonable to gradually transition to a more neutral policy stance over time. Conversely, should inflation continue to remain elevated, there is an understanding that the Federal Reserve might pause its easing stance and maintain the policy interest rate at a restrictive level. Should the labor market show signs of weakening or economic activity falter, easing measures could potentially accelerate. The uncertainty surrounding what constitutes a neutral interest rate contributes to the complexities in the central bank's evaluation of monetary policy constraints, emphasizing that a gradual reduction in policy limitations is deemed appropriate.

Amid these economic shifts, the gold market is witnessing some noteworthy movements. On the one hand, there is an influx of new buyers entering the gold market. Recent data revealed that as of the end of October, Russia's gold reserves reached an impressive $207.7 billion—surpassing the $200 billion mark for the first time in history—with a significant nearly 4% increase since September. This surge brought the proportion of gold within Russia’s total reserves up to 32.9%, a record high since November 1999.

Simultaneously, institutional perspectives have begun shifting. Following the release of recent Fed meeting minutes, many officials did not consider certain factors and chose to maintain relative optimism regarding declining inflation levels while leaning towards continued tendencies of easing policy. In this context, the international gold price reacted with minimal fluctuation, sustaining a trend of horizontal fluctuation. Driven by profit-taking and a surge in safe-haven buying, the market has seen a significant divergence in positions, leading to expectations that gold prices will likely oscillate between $2,560 and $2,680 per ounce moving into December.

Analyst Nitesh Shah noted, while the “America First” policies may lend some support to the dollar in early 2025, the sustained government deficits coupled with a significant increase in federal debts will likely lead to a weakening of the dollar. Furthermore, the Fed’s ongoing monetary easing may put downward pressure on bond yields which, in turn, serves as an additional bullish factor for international gold prices, given the prevailing uncertainties.

Gold continues to stand as a pivotal safe-haven asset amid rising uncertainties, with projections suggesting the international gold price could soar to around $2,850 per ounce by the fourth quarter of 2025. Since November, U.S. Treasury yields and the dollar index have notably rebounded, leading to tempered expectations regarding imminent interest rate cuts. Coupled with the technical reality of severe overbought conditions, gold prices temporarily dipped to around $2,500. In the midterm, with simultaneous slowdowns in the U.S. economy and inflation concerns, gold prices may continue to hover within a high-level consolidation form. Nonetheless, in the short term, prices around $2,400 may present a suitable opportunity for investors to consider adding to their positions.

In summary, the analysis indicates that, in the short term, gold may continue to oscillate around elevated levels. However, from a long-term perspective, should the Fed's rate cut rationale remain intact amidst geopolitical uncertainties and a process of de-dollarization, gold’s role as a crucial safe-haven asset is likely to endure. For those contemplating gold investments, it is prudent to focus less on short-term volatility and instead consider the overall trend of gold prices over extended periods. Given the long-term logic supporting gold prices—ranging from re-inflation trends to de-dollarization—remains robust, gold offers promising potential for appreciation in the medium to long term. Investors are advised to accumulate positions during price corrections and maintain higher levels of engagement when prices are on an upward trajectory.