Gold's short-term volatility contrasts with long-term bullishness

Gold appears to be finding a floor around $4,000 an ounce as it battles competing short-term influences and a shift in how it is traded.

The spot price of the precious metal ended at $4,065.63 an ounce on November 6, having recovered from its low so far this year of $3,869.85 on October 30.

Gold's recovery from its most recent drop below $4,000 an ounce came after it performed a similar trick in July, when it dipped on several occasions below the key psychological level, only to recover.

The yellow metal also came close to dropping below $4,000 an ounce in March, when it slipped to $4,097.99 on March 23, as it corrected amid profit-taking after reaching a record high of $5,594.82 on January 29.

It has been a fairly wild ride for gold in 2026 and much of the commentary has focused on how it appears to have largely lost its traditional role as a hedge against inflation and geopolitical turmoil.

Rather it seems that gold has witnessed more speculative trading, although much of the froth and hot money has been washed out in recent months as it flirted with a break below $4,000 an ounce.

However, gold remains in short-term limbo, caught between competing influences and vulnerable to swings in either direction.

The main risk is weakness in equity markets as investors question the AI investment boom, especially in the wake of the overwhelming victory in the US midterm elections by Democrats, many of whom questioned the need to build more energy-hungry data centres.

Declining equities tend to spark a need for investors to liquidate other assets, and selling gold fits a historical pattern when stock markets correct.

But short-term equity weakness may translate into a medium-term positive for gold, especially if weakness extends into the real economy.

Part of the reason gold has struggled since its record high in January was the shift in monetary policy expectations in the United States to likely higher interest rates.

But the emerging equity weakness and the recent drop in crude oil prices amid renewed hopes for an end to the Iran conflict are likely to once again shift the monetary policy dial back to at least neutral, and possibly even to rate cuts next year.

LONG-TERM BULLS

If the short-term outlook for gold is cloudy and subject to developments in equities and Iran, the longer-term picture is somewhat clearer.

Gold remains an attractive alternative for the world's central banks, especially if they are concerned about the long-term fiscal outlook in the United States, given what many investors believe to be an unsustainable fiscal deficit and a debt mountain that is eating up too big a share of government revenue to service.

Central banks bought 321.2 metric tons of gold in the third quarter, up from 296.3 the previous quarter and the most since the last three months of 2024, according to World Gold Council figures.

It is also worth noting that central bank demand is price-sensitive, with the weakest quarter this year being the first, when demand was just 57.7 tons as the gold price hit its record high.

The recent drop to below $4,000 an ounce is likely to encourage central bank buying in the current quarter.

Investors are also showing more interest in gold, with council data showing inflows of 19 tons in October into exchange-traded funds, adding to the 211.2 tons seen in the third quarter, which reversed a decline of 47.3 tons in the second.

The third leg of gold demand is jewellery, which is led by China and India, which together account for almost two-thirds of global demand.

Lower prices in recent months are likely to boost jewellery demand, with traders in India reporting increased interest as key festivals approach.

India's jewellery demand was 99.9 tons in the third quarter, according to the World Gold Council, the most since the fourth quarter of last year.

China's jewellery demand rose to 71.9 tons in the third quarter, up from 55.7 tons in the second.

Overall, the short-term drivers of gold have shifted to be more reliant on speculative trading driven by moves in equities and crude oil, especially as they relate to changing monetary policy expectations.

But the longer-term bull case of asset diversification amid global fiscal issues and rising jewellery demand in India and China remains in place.

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The views expressed here are those of the author, a columnist for Reuters.