Investment Market Outlook | Gold Pullback: Long-Term Catalysts Remain

Spot gold prices plummeted after hitting an intraday high of $5,595 per troy ounce on January 30. We believe the pullback was triggered by multiple factors. One of the most significant factors is President Trump's nomination of Kevin Warsh to replace Jerome Powell as Fed Chair in May. Warsh, who served as a Fed governor from 2006 to 2011, advocates for tighter monetary policies to curb inflation. This has led to a rebound in the US dollar.In addition, profit-taking and the unwinding of leveraged positions also exacerbated the decline.

Excessive optimism towards gold caused the market to overreact to shifts in expectations regarding the Fed’s policy.Though this volatility may seem unusual, it is reasonable considering that gold had recently become one of the highest-conviction trades in the market. This led to an overreaction to Warsh's nomination. In fact, while Warsh advocates for shrinking the Fed’s balance sheet to rein in excess liquidity, he has recently aligned with Trump’s view on pushing for interest rate cuts. We will learn more about his stance on monetary policy during Senate hearings and other public speaking events.

Nevertheless, the long-term catalysts for gold remain:

1. Lower US interest rates and a weaker US dollar:Warsh advocates for interest rate cuts to support economic growth. We expect the Fed to cut interest rates two to three times this year, each by 25 basis points, which could weaken the performance of the US dollar. Moreover, we believe that Trump aims to boost US manufacturing and the overall economy by lowering interest rates and weakening the dollar.

2. Currency depreciation trade:Global and US fiscal deficits are expected to continue expanding in the foreseeable future. The International Monetary Fund (IMF) forecasts that the ratio of US government debt to GDP will rise from 125.0% in 2025 to 143.4% by 2030, while the global government debt-to-GDP ratio will exceed 100% by 2029. Concerns over excessive money printing and the declining purchasing power of fiat currencies will sustain investor demand for hard assets and tangible assets, including gold.

3. Central bank demand/hedging geopolitical risks:Physical gold has long been regarded as a form of currency that transcends sovereignty, with no default risk or sanction risk. Since Western countries seized and froze Russian assets in 2022, global central banks' demand for increasing gold reserves has significantly risen. According to the World Gold Council, global central banks added 863 tons of gold reserves in 2025.

4. Portfolio diversification tool:Even though gold prices have pulled back sharply recently, gold remains a reliable choice for portfolio diversification due to its low and negative correlation with the performance of traditional stocks and fixed-income assets. Data from various sources show that both global institutional and retail investors allocate only a very small proportion of gold in their portfolios, which could even be considered negligible.We tend to view gold as a long-term investment rather than a short-term speculative tool, and we will gradually increase the allocation of gold in our asset portfolios.5%to10%。

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