Key insights
- Gold prices have fallen significantly from their recent highs, despite conditions typically favorable for the metal like rising inflation and economic uncertainty. This decline may be linked to potential Federal Reserve actions, causing investors to re-evaluate their positions in precious metals. The article suggests that anticipated Fed policy shifts are overshadowing traditional gold demand drivers, potentially signaling a shift in investor sentiment away from safe-haven assets.
Gold hit a record price of $5,418 per ounce in January, but it has since plummeted by 23% to trade at $4,174 as I write this, a new low for 2026. Conditions seem to be perfect for further upside in the shiny yellow metal with inflation climbing, government spending soaring, and economic uncertainty on the rise, so why the sharp decline?
It might have something to do with a looming potential move at the Federal Reserve, which is forcing investors to reconsider their positions in precious metals.
Outside of governments and central banks, most gold demand comes from investors who use it to hedge against economic and political uncertainty. Some of them still buy physical metal, but an exchange-traded fund (ETF) like the SPDR Gold Shares ETF (GLD 2.90%) can be a more convenient alternative for those who don't want to deal with expensive storage and insurance.
Gold is extremely scarce, with just 219,890 tons extracted from the Earth throughout human history, compared to around 1.7 million tons of silver, and billions of tons of other commodities like coal and iron ore. Scarcity is a key reason why gold has been considered a store of value for thousands of years.
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In the past, many governments even adopted the "gold standard," which involved pegging the value of their domestic currencies to the yellow metal. This meant they couldn't print more money unless they had an equal amount of physical metal in reserve, which kept a lid on inflation. The U.S. government abandoned this mechanism in 1971, which unsurprisingly led to a sharp increase in the money supply.
As a result, the U.S. dollar has lost around 90% of its purchasing power over the last five decades, driving up the value of gold in dollar terms. Therefore, even though the yellow metal doesn't produce any revenue or earnings (which is why some investors like Warren Buffett avoid it), it has been a very reliable hedge against the debasement of paper currency.
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The U.S. government ran a budget deficit of $1.8 trillion in fiscal 2025 (ended Sept. 30), and it's on track for another trillion-dollar deficit in fiscal 2026. As a result, the national debt is now almost $40 trillion.
Paul Tudor Jones, a prominent hedge fund manager, says governments throughout history have tried to inflate away their debt by printing more money to debase their currency. By creating inflation, businesses and workers wind up with higher incomes over time, creating a much bigger tax base, which makes government debt easier to service. But this strategy is also dangerous, because it can erode faith in the underlying currency and push investors into alternatives like gold.
While it sounds like gold is destined for higher ground, the Fed could spoil the party. With the Consumer Price Index (CPI) measure of inflation currently hovering well above the central bank's 2% annualized target, Wall Street is eyeing a potential interest rate hike.
According to the CME Group's FedWatch tool, which measures the probability of interest rate moves based on activity in the 30 Day Fed Funds futures market, there is currently a 72% chance policymakers will hike rates at least once before the end of 2026.
Normally, when financial conditions tighten, consumers, businesses, and governments alike have to tighten their purse strings, which could reverse the catalysts that fueled gold's blistering rally to new highs earlier this year. It seems investors might be getting ahead of that scenario, which is why gold is down sharply from its recent peak.
Gold soared by 64% in 2025, but investors certainly shouldn't expect similar gains going forward. The shiny metal has delivered an average annual return of 7.3% over the last 50 years, underperforming the S&P 500 (^GSPC 0.47%) stock market index, which climbed by 11.6% per year over the same period.
A declining U.S. dollar is a tailwind for all investible assets, not just gold. The companies in the S&P 500 typically generate revenue and earnings growth, providing investors with additional upside beyond inflation, which is why the stock market typically outperforms precious metals over time.
But it's not a bad idea for investors to own a small amount of gold as part of a diversified portfolio, because it tends to perform well during periods of heightened uncertainty, whereas such conditions often lead to volatility in stocks and other assets.
The SPDR Gold Shares ETF can be a good alternative to owning physical metal because it can be bought and sold instantly through any major investing platform and doesn't require storage or insurance. It has a relatively low expense ratio of 0.4%, meaning a $10,000 investment would incur an annual fee of just $40.