- Gold powered to $4,381/oz recently, setting consecutive records along the way. Traders placed bids in response to firm expectations that the Federal Reserve has embarked on an easing cycle, even as inflation is set to move further above its inflation target. The ever-louder narratives surrounding dedollarization and deglobalization, aggressive official sector purchases, China offering to be a bullion custodian for foreign central banks, and the reduced carry and opportunity costs as the yield curve responds to rate expectations, have all galvanized demand. Western investors grew their physical ETF and derivative exposure, motivated by the fear of missing out and assumptions the US government shutdown will augment rate cuts.
- Given the speed and magnitude of the rally since mid-August, which saw the yellow metal jump by over $1,000/oz (34%), there is a risk that CTAs and others may be tempted to take some profits, as the “perfect” environment seldom holds consistently. The yellow metal looked overbought, which suggests that any questions around the speed of the Fed’s easing, or an increase in volatility, could generate a robust downside. This could see a significant unwind of the late-summer rally in the relative near-term.
- We expect the average price of gold to reach a new quarterly record north of $4,400/oz in the first six months of 2026, as the Fed eases into a higher inflation environment, the official sector keeps buying, and discretionary funds again position long. Peak prices could be significantly higher, as per normal market volatility.
Steeper Yield Curve, Fear of Missing Out Key Reason for Record Gold
The yellow metal has jumped to an all-time high of $4,381/oz recently, which was also higher than the record inflation-adjusted price reached back in early-1980. Traders placed bids in response to firm expectations that the Fed has embarked on an easing cycle, as it tilts policy toward its maximum employment mandate under the Federal Reserve Act.
Money managers who likely missed much of the early part of this year’s rally, due to their discomfort of getting long while short-term rates were high, have now moved into the yellow metal through the late summer, as their carry costs were expected to drop along with the Fed’s renewed enthusiasm to ease.
Traders were betting that the US central bank will cut rates, despite inflation moving further above its two percent inflation target. This would bring real rates on the short end of the curve sharply lower. As such, physical gold ETF holdings jumped some 14.85 million oz (+18%) since the start of the year, while non-commercial length increased too. All this was happening as monetization and de-dollarization themes convinced the market that central banks will continue to aggressively grow their exposure to the yellow metal, continuing the trend of 1,000+ tonnes of annual purchases into the future.
Fed Tilts to Max Employment Mandate Even as Inflation Edging Further Above Target — A Positive for The Yellow Metal
Back in January 1980, the yellow metal hit its record some five months before real rates went sharply lower. Then Fed Chair Volker clamped down on inflation and gold went south. But there is no Volker-like figure in the offing, instead the FOMC may be filled with relative doves come May 2026, who see the two percent inflation as a suggestion rather than a hard target which must be reached at any cost. Some investors and central banks are also likely concerned that the US central bank may deploy a form of quantitative easing to suppress the longer end of the yield curve to lower funding costs, where actual lending happens.
This would mean that US paper may have a hard time compensating for inflation. Given gold’s ability to reflect inflation, owing to the fact it requires labor and productive capital to produce, it may be a better safe haven than Treasuries. Add to that the fact that ore grades are dropping, the increased use of these factors of production suggests that gold would be better at protecting purchasing power.
Hence, the specs who missed much of the recent gold upward run may want to position into the yellow metal as they seem to be underinvested. With portfolio managers now increasingly talking about 25-25-25-25 portfolios or some similar combination, which would include gold and commodities as a tranche, investor demand may become quite robust into 2026. A portfolio allocation tilt toward gold and commodities and away from a standard 60-40 equity-bond allocation would be a very accretive game changer for gold and friends.
But Rallies Seldom Go Uninterrupted
Considering the speed and magnitude of the late-summer gold surge, which brought gold into $4,400 territory, a jump of some $1,000+/oz (34%), there is a risk that systematic trend following funds (CTAs) and other algorithm-driven asset allocators are setting up to reduce length. Indeed, CTA have already reduced their positioning from a 70% of maximum length to low-20%, which was not enough to lead to any major unwind or prevent prices from hitting new highs.
However, if the current perceived “perfect” environment for gold wanes a little, we could see ETF investors take profits, which can trigger CTAs to follow the trend lower, particularly if volatility spikes. It should be noted, trend-following funds are also voltargeting, which suggests that higher volatility will force a selloff as it increases value at risk. Stronger-than-expected US economic data, a government reopening, or anything which reduces rate cut expectations could send vol higher.
Since algorithmic funds are heavy on long exposure, this would mean that there could be a long liquidation in the event volatility spikes. This could trigger a technical sell-off as well. Based on measures such as the RSI, gold has recently been significantly over-bought. Plus, gold was trending some 33% above the 200dma, and historically premiums of above 20% don’t tend to last.
Short-Term Correction Yes, But Long-Term Looking Accretive for the Yellow Metal
While a data and volatility inspired correction is a real possibility, we don’t expect a sustained rout. In fact, we see gold moving materially over the $4,400/oz mark into 2026, once it becomes apparent that the Fed is continuing with the easing cycle amid a weaker economy, higher inflation and a US central bank that will be filled with doves.
US debt, which in September 2025 was estimated to be U$37.43 trillion and some 125% of Gross Domestic Product (GDP), is growing at an alarming rate after the passage of the Big Beautiful Bill Act. There is also a risk that tariffs may be judged to be illegal, and the government will need to rebate the revenues it collected, increasing the deficit even higher.
Tariffs and a turbulent US-China relationship is likely the reason the Middle Kingdom has little appetite for Treasuries, and we see its current account surplus being used to buy gold and commodities. Sky-high tariffs also reduce available dollars held by exporters to purchase treasuries.
The concern is that this debt may need to be partially monetized (by artificially keeping short and long term rates low, implying gold could be a better yielding instrument), as there is little appetite for higher taxes in the US and potentially insufficient demand from global investors to absorb all this paper. Additional competition from trillions of new Eurobond issues, as countries in Europe embrace deficit spending and grow their military footprint, may be an additional reason why all the issued Treasuries may not be easily absorbed.
Lower USD holdings from trade with the US in the new tariff environment may well add to these concerns. If uber-high US tariffs remain, the world may trade around America, reducing the need for greenbacks. Any material USD devaluation would be favorable for gold.
Tariffs and a turbulent US-China relationship are likely the reasons the Middle Kingdom has little appetite for Treasuries, and we see its current account surplus being used to buy gold and commodities. Sky-high tariffs also reduce available dollars held by exporters to purchase treasuries.
Gold investors and central banks may also worry that US monetary authorities will be pressured by the Trump administration to cut rates, even if inflation is significantly above target. The concerns surrounding Fed credibility are raising speculation that there could be de facto partial monetization of US debt, which would suppress real yields as inflation runs above target.
The Official Sector a Manna for Gold
In addition to using gold to moderate the impact of purchasing power erosion and de-dollarization, geopolitical tensions have been accretive for the yellow metal. A rise in geopolitical tensions over the last several years has seen gold become a much more important asset held by central banks around the world.
Central banks have been the big buyers, supporting the gold rally recently and for the last several years. Indeed, 2022 saw central banks buy a record 1,080t of gold, a near record amount of 1,051t in 2023, and another 1,089t in 2024. Central banks look set to buy a 1,000+t in 2025 as well. This buying spree coincides with a trend among central banks globally to diversify their holdings to reduce their reliance on the US dollar, a trend which is continuing in 2025. Indeed, central banks in aggregate hold about a quarter of FX reserves in the form of the yellow metal.
While the central bank of Poland, Kazakhstan and Turkey have been aggressive buyers, it is the People’s Bank of China (PBoC) which has been on the forefront of investor chatter due to its size. It snapped up the yellow metal for the last two years — with its holdings rising sharply to 2,302t in August. But that still represents only 7.6% of its $3.317 trillion FX reserve. There is much more room for China to grow its gold holdings, when compared to the US’s nearly 75% share. At current prices, a 10% increase in Chinese FX gold translates to a purchase of some 2,600 tonnes. This suggests that if China truly is diversifying from USD, its purchasing program will take many years.
New Record in The Cards
Gold’s new range seems to be $3,500-4,400/oz. In order for prices to go through that lower bound and to stay below the lower end of the range, it may take a shift in investor attention back to rising US risk asset prices, a view change that the US economy will not weaken, and no further Federal Reserve rate cuts. But we suspect that the economy will weaken, risk markets may have a difficult time rallying next year, and we expect the US central bank to cut, even as inflation stays stubbornly above the two percent inflation target.
The yellow metal should increase in price into 2026 given lower interest rates at a time inflation is increasing, less appetite for Treasuries as US debt surges to new records, growing fears that the world will have less need for US dollars and less available for Treasury purchases by foreigners given a high tariff environment, and the prospect of trillions in Eurobonds competing for capital,. As such, central banks, ETF investors and the under-positioned discretionary traders are expected to place strong bids on gold during that time. As such, we project the average quarterly price to hit a record $4,400/oz in the first six months of 2026, with trading peaks considerably above those levels.
