Gold’s rollercoaster ride: Key factors driving the ongoing price volatility

After a stellar rally that saw gold prices surge from around Rs 70,300 per 10 grams in August to a peak of Rs 81,800 per 10 grams by October, the yellow metal has shown signs of weakness, correcting nearly 5 per cent in just a few days. This price swing comes as part of a broader trend seen globally, where gold has been on a steady uptrend since early 2024, driven by macroeconomic uncertainties, inflation concerns, and geopolitical tensions.

Global and domestic drivers behind gold’s roller-coaster trend

The recent volatility in gold prices can be attributed to a mix of factors, both international and domestic. High inflation rates have historically provided support to gold prices as investors look to hedge against currency devaluation. While inflation peaked in 2022, it has remained persistently high, impacting economic growth and influencing the stance of central banks globally. After months of aggressive rate hikes, there is now growing speculation that interest rates have peaked, and cuts may follow soon, providing further impetus for gold’s potential rebound.

However, uncertainty around interest rate cuts persists, especially with Donald Trump’s re-election casting doubts over the future economic policy landscape. His promises of tax cuts and deregulation could stimulate the U.S. economy, potentially curbing gold’s upside in the near term if the dollar strengthens.

Gold continues to shine amid rising geopolitical tensions and the growing narrative of de-dollarisation, especially with the upcoming US election outcome and the BRICS nations’ intent to challenge the dollar's dominance. Historically seen as a hedge against inflation and conflict, gold's appeal has surged as countries reconsider their reliance on a single currency. With digital currencies losing favour due to concerns over transparency and security, gold has regained its status as a preferred safe haven. "In uncertain times, gold remains the old reserve currency, offering stability when other assets falter," highlights Vivek Banka, Co-Founder, of GoalTeller. Over the past decade, gold has delivered steady returns, outpacing many investments, particularly in volatile markets. However, investors are advised to be cautious, especially given the asset's cyclical nature and potential for short-term price swings.

Geopolitical tensions and recession

Recession concerns continue to loom large over developed markets, including the U.S., where recent data indicates a mixed economic outlook despite a robust labour market. Gold, often seen as a safe-haven asset, has historically benefited during periods of economic downturn. Demand for gold has surged among central banks and individuals, particularly in the Middle East, as a hedge against geopolitical risks, including the ongoing Middle East conflict.

The strong demand signals that the ‘smart money’ is positioning itself for potential economic shocks ahead. In India, too, there has been a spike in gold purchases, with retail investors turning to ETFs for quick and flexible exposure.

The rally in the U.S. dollar following Trump’s victory has contributed to the recent pullback in gold prices. A stronger dollar makes gold more expensive for holders of other currencies, dampening demand. However, there is uncertainty over how long this dollar strength will last, as much depends on the economic outcomes of Trump’s policies and the broader trajectory of the U.S. economy.

Additionally, the emotional aspect of gold investment, often driven by fear of missing out (FOMO), has kept demand steady despite recent price dips. Retail investors, especially those buying through ETFs, have shown an inclination to increase their holdings during price rallies, though this sentiment tends to reverse sharply during corrections.

As noted by analysts, gold prices sharply declined in the first week of November after hitting new all-time highs. Trump’s re-election and subsequent geopolitical developments triggered a tariff war, boosting the U.S. dollar.

 "The first week of November saw gold move lower after hitting a new all-time-high on the first day of the month as President Trump trumped the polls! Asians remained net buyers amidst this chaos though North America saw major selloffs in Gold ETFs. The USD gained substantially – all negative factors for gold. A daily close below the prior trend low of 2,590 has confirmed a near-term bear trend, with the next support levels at 2,534 and 2,470" says Sandip Raichura, CEO - Retail Broking and Distribution, Director - PL Broking and Distribution.