After a strong rally from 2025 to early 2026, the global precious metals market has undergone a significant correction.

From late January to mid-October this year, gold prices fell more than 20% cumulatively, while silver, platinum, and palladium all dropped more than 40%. Behind this correction, the most important change is the shift in global monetary policy expectations from rate cuts to rate hikes, as investors begin to reassess the opportunity cost of holding precious metals.

However, even after a significant pullback, precious metals prices remain about 24% to 100% higher than at the start of 2025. Gold has not only retained a considerable portion of its prior gains but also declined noticeably less than other precious metals during this correction.

Two opposing forces have thus emerged in the gold market: on one hand, global central banks are re-tightening monetary policy, continuously suppressing prices of non-yielding assets; on the other hand, fiscal deficits, inflation risks, geopolitical instability, and continued central bank gold allocation are still providing support to the market.

As gold falls from above $5,000 per ounce to around $4,200, whether central bank gold-buying demand—which may have slowed due to excessively high prices—can be unleashed again has become an important indicator to watch in the gold market going forward.

Fed shifts to rate hikes, gold's rally logic reversed

The turning point for gold prices appeared almost simultaneously with the news of Kevin Warsh's nomination to serve as Federal Reserve Chairman.

Warsh has long been regarded as a monetary policy hawk, skeptical of quantitative easing and zero-interest-rate policies. This stands in sharp contrast to previous market expectations that the White House might push the Fed toward further rate cuts.

As Warsh takes the helm of the Federal Reserve, the direction of monetary policy has gradually shifted. The Fed ended its easing bias in June of this year and implemented a rate hike in September, while signaling that further monetary tightening may lie ahead.

This shift was quickly reflected in the interest rate futures market.

Pricing in federal funds rate futures and the SOFR market shows that investors have begun to expect the Fed may raise rates multiple times over the next 12 to 24 months. This is the first time since 2022 that the market has priced in expectations of multiple rate hikes.

The change in rate expectations has directly weakened the appeal of gold. Gold itself generates no interest; when short-term rates rise, the returns on holding cash, government bonds, and other interest-bearing assets increase accordingly, and the opportunity cost investors bear for holding gold rises further.

More importantly, this round of monetary tightening is not unique to the United States.

The European Central Bank, the Bank of Japan, the Reserve Bank of Australia, the Norges Bank, and the Bank of Korea had already entered rate-hiking cycles before the Fed acted. Major global economies raising rates in sync means the pressure on gold is no longer confined to U.S. dollar assets, but stems from a broader global repricing of capital.

However, while the reversal in rate expectations can explain gold's recent sharp correction, it cannot fully explain why gold prices have not fallen further. As global monetary policy tightens again, government debt and fiscal deficits are forming another force counter to higher rates.

Fiscal deficits continue to widen, long-term allocation demand for gold remains

Expanding fiscal deficits across major global economies are becoming an important supporting factor for gold prices.

According to projections from the U.S. Congressional Budget Office, the U.S. federal government budget deficit could reach 6.6% of GDP in the fiscal year ending September 2027. This projection has not yet accounted for additional military spending that could result from ongoing conflicts in the Middle East, including funds needed to replenish the U.S. Department of Defense's ammunition stockpiles.

More noteworthy is that such a massive fiscal deficit is occurring against the backdrop of a relatively robust U.S. labor market.

The U.S. unemployment rate currently stands at about 4.2%, a historically low level. Typically, a lower unemployment rate means stronger tax revenue and less spending on unemployment benefits, so government deficits should be relatively manageable.

But over the past decade, mandatory fiscal spending such as social welfare has continued to expand, and the cost of federal debt financing has continued to climb, expanding the U.S. budget deficit at the same unemployment rate by about 4 percentage points compared with a decade ago.

A decade ago, when the unemployment rate was around 4%, the U.S. fiscal deficit might have been only about 2.5% of GDP, whereas today that ratio has exceeded 6%.

At the same time, U.S. federal interest payments on debt as a share of GDP have risen from about 1.2% to 3.4%.

Fiscal pressure is not unique to the United States. Budget deficits in Brazil and China are about 8.5% of GDP, while France, Japan and the United Kingdom are in the 4% to 6% range. Except for China, which still faces a lower inflation and interest rate environment, most economies are under pressure from rising debt financing costs.

Population aging has further increased spending on pensions and healthcare, making part of the fiscal pressure long-term.

For gold, this shift has a dual meaning.

On the one hand, persistently widening fiscal deficits may exacerbate inflation and weaken investors' confidence in the long-term sustainability of government debt, thereby enhancing gold's appeal as a store of value. On the other hand, inflation driven by fiscal expansion may also force central banks to continue raising interest rates, putting short-term pressure on gold.

This contradiction is playing out in global markets.

Except for China, core inflation in most major economies remains above central bank targets. Loose fiscal policy, geopolitical conflicts and supply chain restructuring together constitute persistent upward pressure on prices.

More complicating is that rate hikes themselves may in turn increase the fiscal burden. As the scale of government debt expands, higher interest rates mean higher interest expenses. At the same time, slower economic growth may reduce tax revenue and increase fiscal spending such as unemployment benefits.

If governments continue to expand borrowing to cope with these pressures, a mutually reinforcing relationship may form between fiscal deficits and inflation.

In addition, supply chain disruptions caused by conflicts in the Middle East and between Russia and Ukraine, as well as policies by major economies to promote supply chain localization and near-shoring, may also increase corporate production costs. In the face of these supply-side shocks, rate hikes are unlikely to directly solve energy, logistics and goods supply problems, but may inhibit investment and growth in capital-intensive industries such as AI and real estate.

Therefore, the future trajectory of gold does not depend entirely on interest rate levels. If central banks continue to tighten monetary policy but still cannot bring inflation under target, gold may regain upward momentum.

Gold's Advantage Over Stocks Remains as Geopolitical Risks Rise

Over the long sweep of history, gold and U.S. stocks have tended to dominate in different macroeconomic environments.

Over the past century, gold's long-term price performance has nearly kept pace with the S&P 500 Index, but the two asset classes have had markedly different periods of strength.

During periods of economic stability and strong U.S. global influence, U.S. stocks have typically outperformed gold significantly. During periods of economic turbulence, intensifying international conflicts, or market concerns about the stability of the financial system, gold has usually outperformed stocks more notably.

Such divergences can sometimes last ten to twenty years.

Historical data show that in some long-term cycles, U.S. stocks' cumulative excess performance relative to gold reached 1,800% to 240%; in other cycles, stocks' performance relative to gold lagged by 80% to 95%.

For example, from the 1930s to the early 1940s, from the late 1960s to the 1970s, and from 2001 to 2011, gold had a clear relative-performance advantage. By contrast, U.S. stocks were stronger in the 1980s and 1990s, and for most of the period from 2011 to 2021.

Since 2021, even as the U.S. stock market has continued to hit new highs, gold and silver have still led on a cumulative basis, even when recent price pullbacks are taken into account.

In recent years, the U.S. withdrawal from Afghanistan, the Russia-Ukraine conflict, escalating tensions in the Middle East, and the conflict between the United States, Israel and Iran have all reinforced, to varying degrees, market demand for precious metals.

But geopolitical risk does not mean gold is bound to rise.

Since February 28 this year, despite persistent related risks, precious metals prices have fallen sharply as expectations of global rate hikes have rapidly intensified. This shows that when expectations of monetary tightening are strong enough, interest-rate factors can temporarily override safe-haven demand driven by geopolitics.

However, from a long-term historical perspective, when geopolitical uncertainty intensifies, gold can still outperform stocks. Especially if conflicts further push up energy prices, worsen supply-chain disruptions, and force governments to increase fiscal spending, gold's safe-haven attributes may once again come into focus.

Gold Price Falls From $5,000 to $4,200; Can Central Bank Buying Recover?

Compared with other precious metals, central bank demand is one of the most unique supporting factors for the gold market.

Global central banks' attitude toward gold has undergone a long-term shift. From 1982 to 2007, central banks in various countries were net sellers of gold almost every year. But since 2008, central banks as a whole have shifted to sustained net purchases of gold.

This change was initially closely related to the monetary environment after the global financial crisis. In the 2010s, major central banks implemented zero-interest-rate policies and quantitative easing for an extended period, prompting some countries to increase gold reserves to reduce reliance on fiat currency assets.

But since 2021, the factors driving central banks to allocate gold have changed.

As the world entered a rate-hiking cycle, zero interest rates and quantitative easing were no longer the main reasons for central banks to increase gold holdings. Instead, geopolitical instability, inflation persistently above target levels, and long-standing fiscal deficits in major economies took their place.

These factors may all prompt central banks to reassess the risk structure of their foreign exchange reserves.

However, rising gold prices themselves may also dampen central banks' willingness to buy.

When gold prices briefly broke through $5,000 per ounce, some central banks may have already slowed their pace of purchases. Now that gold prices have fallen back to around $4,200 per ounce, the price adjustment may rekindle gold-buying interest among some central banks, especially those concerned about the fiscal conditions of other countries and the escalation of international conflicts.

This change is particularly important for understanding the current gold market.

Central banks' gold allocation typically serves goals such as foreign exchange reserve diversification, long-term asset safety, and risk management, and its investment cycle differs markedly from that of short-term speculative funds.

Therefore, if the structural factors driving central bank gold purchases have not disappeared, a sharp pullback in gold prices may only change the pace of central bank buying, rather than meaning a reversal in long-term demand.

However, there is still a lack of sufficient up-to-date central bank gold purchase data to prove that this round of price adjustment has already driven official buying to reaccelerate. That high prices may dampen purchases and price declines may stimulate demand remains a market judgment yet to be verified by actual gold purchase data.

Central bank demand may also explain why gold has shown greater resilience in this round of precious metals adjustment.

Unlike gold, silver, platinum, and palladium have extensive industrial uses, and their prices are not only affected by interest rates and investment demand but are also closely tied to industrial production and the economic cycle.

More importantly, global central banks' precious metals reserves are mainly concentrated in gold, and they basically do not hold other precious metals on a large scale.

Therefore, under the same pressure of rising interest rates, gold can gain additional demand support from official reserve allocations, while other precious metals are more susceptible to the dual impact of changes in industrial demand and the withdrawal of investment funds.

From the end of January to mid-October this year, gold prices fell more than 20%, while silver, platinum, and palladium fell more than 40%. Central bank demand may be one of the important reasons for this divergence.

The key to gold's future outlook still lies in the tug-of-war between interest rates and long-term funds

The gold market is currently caught in a tug-of-war between two opposing forces.

In the short term, the Federal Reserve and other major central banks re-entering a rate-hiking cycle means that interest-bearing assets such as cash and bonds have become more attractive. This is the main reason for gold's sharp pullback from its highs earlier this year.

But in the long term, persistently high global fiscal deficits, rising debt interest costs, inflation remaining above target, and increased geopolitical risks may all limit the downside for gold prices.

The long-term trend of continued central bank gold allocations provides another layer of demand support for the market.

If monetary policy continues to tighten and inflation effectively falls back in the future, gold may continue to face price pressure. Conversely, if fiscal deficits expand, geopolitical conflicts intensify, or central banks once again increase gold reserve allocations, gold prices may regain support.

Particularly noteworthy is whether official reserve funds will increase purchases again after gold prices fell from above $5,000 per ounce to around $4,200.

Whether gold can end this round of adjustment depends not only on when the Federal Reserve stops raising rates, but also on whether long-term allocation funds such as central banks can rebuild sufficiently strong buying after prices fall.

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia