Investment Market Outlook | Gold Pulls Back: Long-Term Catalysts Remain

[For Hong Kong investors only]

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Spot gold prices plunged sharply after hitting an intraday high of $5,595 per troy ounce on January 30. We believe the pullback was triggered by multiple factors, with one of the most significant being President Trump’s nomination of Wachter to succeed Powell as Federal Reserve Chair in May. Wachter served as a Fed governor from 2006 to 2011 and has advocated for a tighter monetary policy to curb inflation, prompting a rebound in the U.S. dollar.Moreover, profit-taking and the unwinding of leveraged positions have exacerbated the decline.

Bullish sentiment toward gold has caused the market to overreact to shifts in expectations regarding Federal Reserve policy.Although this volatility is unusual, it is understandable given that gold has recently become one of the market’s highest-conviction trades. This led to an exaggerated market reaction to Wallsh’s nomination. In fact, while Wallsh has advocated for shrinking the Fed’s balance sheet to curb excess liquidity, he has recently aligned with Trump’s stance in favor of interest rate cuts. We will gain further clarity on his monetary policy views during Senate confirmation hearings and other public appearances.

Nevertheless, the long-term catalysts for gold remain intact:

1. Lower U.S. interest rates and a weaker dollar:Wallsh supports rate cuts to bolster economic growth. We expect the Fed to cut rates two to three times this year, each by 25 basis points, which could weigh on the dollar. Additionally, we believe Trump favors lower rates and a weaker dollar to boost U.S. manufacturing and the broader economy.

2. Currency debasement trade:Global and U.S. fiscal deficits are expected to continue expanding in the foreseeable future. The International Monetary Fund (IMF) forecasts that U.S. government debt as a share of GDP will rise from 125.0% in 2025 to 143.4% by 2030, while global government debt relative to GDP is projected to exceed 100% by 2029. Concerns about money printing and declining purchasing power of fiat currencies will sustain investor demand for hard and physical assets, including gold.

3. Central bank demand / hedging against geopolitical risks:Physical gold has historically been viewed as a form of money that transcends sovereignty and carries no default or sanction risk. Since Western nations seized and froze Russian assets in 2022, demand from global central banks to increase gold reserves has risen significantly. According to the World Gold Council, global central banks added 863 tonnes of gold to their reserves in 2025.

4. Portfolio Diversification Tool:Even though gold prices have recently declined sharply, gold remains a reliable choice for portfolio diversification due to its low and negative correlation with traditional equities and fixed-income assets. Data from various sources indicate that both global institutional and retail investors allocate only a minimal—indeed, negligible—portion of their portfolios to gold.We view gold more as a long-term investment rather than a short-term speculative instrument and are gradually increasing our gold allocation to5%to10%。

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