The decline in the price of gold by nearly 29% from the record high it reached in late January served as a reminder that the precious metal is not always a safe choice for those seeking short-term returns.
On the other hand, it continues to be viewed as an investment that pays off primarily over the long term.
The impressive rally, from approximately $2,000 per ounce in February 2024 to the all-time high of $5,594 in January, has given way to a sharp correction. Following the outbreak of war in the Middle East, the price trended downward and last Wednesday fell below $4,000 per ounce.
Although gold usually strengthens during periods of international uncertainty—as was the case during the war between Israel against Hamas in 2024 and U.S. President Donald Trump in 2025—this time, the market took a different course.
Inflation, interest rates, and the stock rally changed the mood
The main cause of the decline is attributed to the rise in inflation, which stemmed from the energy crisis triggered by the war in the Middle East. The markets anticipated that the Fed, as well as other major central banks, would raise interest rates, making investments in fixed-income securities more attractive.
In the same vein, the European Central Bank raised its deposit rate in June to 2.25%, from 2%, further reinforcing this trend.
At the same time, international stocks rebounded after the initial shock of the war, led by the Artificial Intelligence sector and the technology sector as a whole. Many investors chose to lock in significant profits from gold, which they had acquired at much lower prices, putting additional pressure on the market.
History Repeats Itself – Central banks continue to buy gold
The price trend of gold has shown in the past that sharp rallies can be followed by multi-year periods of decline. A prime example is 1980, when, following the second oil crisis, its price had skyrocketed to $680 per ounce, only to be followed by nearly 37 years of trading at significantly lower levels.
The next major rally came after the financial crisis of 2007, pushing gold above $1,860 in September 2011. A new period of decline followed, until it once again surpassed $2,000 in 2020, amid the coronavirus pandemic.
gold exchange-traded funds (ETFs) are also playing a significant role in the current correction; they had supported the rise in recent years but are now experiencing continuous capital outflows.
In contrast, central banks continue to build up their gold reserves. According to a recent survey by the World Gold Council, 45% of central banks expect to increase the share of the precious metal in their foreign exchange reserves over the next twelve months.
Protection against inflation, greater portfolio diversification, and heightened geopolitical risks remain the key reasons why gold retains its significant position. At the same time, 74% of the central banks that participated in the survey estimate that over the next five years, their exposure to assets denominated in dollars will decrease, to a greater or lesser extent, their exposure to assets denominated in dollars.
