- Gold’s 12% one-day plunge, the largest since 1983, highlights how sentiment-driven the metal is, rather than signalling a clear fundamental buying opportunity.
- Policy shifts under the Trump administration, including the removal of implicit price support for critical minerals, have accelerated the unwinding of speculative premiums across metals.
- The nomination of Kevin Warsh has eased earlier fears of the Fed losing its independence.
- Despite persistent narratives around debasement and de-dollarisation, the fundamental long-term drivers of USD strength remain intact.
- We think that gold serves as a portfolio diversifier with a recommended allocation of 0%–10%.
Gold has seen a sharp reversal in fortunes. After reaching a record high near USD 5,600, the metal retreated below USD 5,000, plunging more than 12% in a single day, its largest one-day drop since the early 1980s. While some investors may interpret this pullback as a buying opportunity, we believe the scale and speed of the sell-off reinforce our cautious stance on gold.
Related article: Is it time to buy the dip in gold?
The new Fed chair has been nominated, easing fears of the Fed losing its independence
On 30 January 2026, President Trump nominated Kevin Warsh as the next Federal Reserve Chair, helping to restore confidence in US institutional credibility. Gold and silver sold off following the announcement, as investors unwound “safe-haven” positions that had been built on earlier fears of the Fed losing its independence.
Warsh is widely regarded as an independent monetary thinker, easing concerns that the Fed would bow to political pressure for aggressive or destabilising rate cuts. While Trump has advocated aggressive rate cuts, analysts expect Warsh to support rate reductions only within clear limits, avoiding currency debasement.
This reassurance was echoed in fixed-income markets, where US Treasury yields and rate futures remained largely stable. The muted market response suggests continued confidence in the Fed’s independence and the resilience of the US financial system.
The US government may no longer back prices for critical minerals projects
Around the same time, reports surfaced that the US government may no longer step in to support prices for critical minerals projects, signalling less direct intervention in commodity markets. Together, these developments reduced the need for investors to seek protection in gold, setting the stage for the sharp correction that followed.
In closed-door discussions with mining executives, senior officials reportedly stated, “We’re not here to prop you guys up,” suggesting that the government will no longer provide implicit price floors for such projects. Instead, support, if any, may come through alternative channels such as equity participation rather than direct price guarantees.
The removal of this perceived government “safety net” forces projects to stand on their own financial viability, introducing a higher degree of market discipline and risk into the commodities complex. Once markets realised that asset prices may no longer be implicitly backstopped, speculative premiums across metals (gold and silver included) unwound rapidly.
Debasement trades and de-dollarisation are short-term
A central pillar of the long-term bullish case for gold is the expectation of a structurally weaker USD over an extended horizon. We disagree with this premise. Despite persistent narratives around debasement and de-dollarisation, the fundamental drivers of USD strength remain intact.
First, global capital continues to flow into US assets. Investor demand for US equities and credit remains robust, underpinned by the dominance of American corporates, particularly in technology and innovation-led sectors. This sustained demand provides a structural tailwind for the currency.
Second, institutional credibility remains intact. The continued stability of the US Treasury market reinforces confidence in the Federal Reserve’s ability to conduct monetary policy without political interference. A true loss of confidence would likely manifest in disorderly yield moves—something we have not observed.
Finally, while de-dollarisation frequently features in headlines, the reality of global financial infrastructure tells a different story. The USD remains deeply embedded in global trade settlement, reserve holdings, and transaction systems. Displacing such a powerful network effect is a multi-decade process, not a cyclical shift. As long as the USD remains the backbone of global trade, the “weak dollar” thesis underpinning gold’s bull case remains fragile.
Gold is sentiment-driven, not fundamentally anchored
Stripping away the “dollar collapse” narrative leaves gold with limited fundamental justification. Unlike equities or bonds, gold is a non-productive asset. It generates no earnings, dividends, or interest income.
Its valuation is therefore heavily driven by sentiment and macro narratives, such as fear, inflation anxiety, or geopolitical stress, rather than underlying economic cash flows. This makes gold difficult to value and inherently susceptible to boom-and-bust cycles. The recent sell-off is a reminder that gold’s “safe-haven” status is often more psychological than structural.
The opportunity cost of holding gold
Allocating capital to gold also carries a meaningful opportunity cost. Every dollar invested in gold is a dollar not earning yield from interest-bearing assets. With US Treasuries yielding around 4% and Singapore Government Securities offering roughly 2%, investors holding gold are forgoing predictable, compounding cash flows.
History underscores this trade-off. A USD 100 investment in gold in 1971 would be worth approximately USD 12,000 today (as of 30 January 2026)—a respectable outcome, but one that pales in comparison to the roughly USD 33,000 generated by the S&P 500 over the same period.
Figure 1: Investing USD 100 in the S&P 500 back in 1971 would have generated greater returns than investing the same amount in Gold
Conclusion: A portfolio diversifier, not a cornerstone
We recognise that gold has historically functioned as a hedge during periods of extreme stress and USD weakness. While we remain constructive on US assets (especially those technology names) and the USD over the long-term, gold can still play a role as a portfolio diversifier given its generally low correlation with equities and bonds.
That said, correlations have risen modestly in recent years. Gold’s correlation with US stocks increased to around 0.097 between 2021 and 2026, reducing its diversification benefits at the margin.
Table 1: Correlation between Gold and other asset classes
|
Periods |
Gold vs MSCI US |
Gold vs US Treasuries |
Gold vs Commodities |
Gold vs US Corporate Bonds |
|
Jan 1971 – Jan 2026 |
-0.001 |
0.075 |
0.432 |
0.091 |
|
Jan 2021 – Jan 2026 |
0.097 |
0.384 |
0.132 |
0.344 |
|
Source: World Gold Council. Monthly data are used in the computation. Gold is based on LMBA Gold Price while US Treasuries, Commodities and Corporate Bonds are based on BBG indexes. Data as of 23 January 2026. |
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As such, we do not advocate “buying the dip” in gold for capital appreciation. Instead, gold should be viewed as a portfolio diversifier. For investors seeking diversification, a modest gold allocation of 0% to 10% can be appropriate. Instruments such as SPDR Gold MiniShares (NYSE: GLDM) provide an efficient way to implement this exposure.
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