Explained: Why gold investors should tone down expectations as yellow metal plunges to a 1-year low

Gold’s sharp reversal from January’s record high has put the precious metal under renewed pressure, with analysts warning that the correction may not be over. After surging past $5,595 an ounce in January, gold has fallen more than 30% from its peak, slipping below $4,000. While the decline has pushed prices closer to oversold territory, a sustained recovery remains uncertain.

The pressure on gold has intensified as renewed tensions over the Iran war drive crude oil prices higher, stoking inflation concerns and fuelling expectations of further US Federal Reserve rate hikes later this year. At its latest meeting, the Fed raised interest rates for the first time in three years, and investors expect the tightening trend to continue in upcoming meetings.

Here’s why analysts are nervous

Bank of America (BofA) expects gold to remain below $4,000 over the next three months, while forecasting an average price of $4,000 an ounce in the fourth quarter. Its demand tracker points to a 16.6% year-on-year decline in purchases by key buyers. Indian imports fell 77.8%, while Chinese imports increased 39.3%.


Jewellery demand has also weakened. Data from the World Gold Council shows that jewellery demand declined 25% in the US, 15% in India and 28% in China during the second quarter.

Central bank activity presents another potential headwind following a period of strong buying earlier this year. In its October 12 note, BofA flagged the possibility that central banks could turn sellers amid escalating tensions in the Middle East. “With the Middle East conflict escalating again, there is a risk that central banks could resume sales,” BofA said, according to a Yahoo Finance report.

The bank pointed to Turkey’s net gold sales of 82 tonnes and Russia’s 56 tonnes through August, according to the World Gold Council, as examples of this trend.

Inflation and monetary policy are adding to the pressure. US consumer prices rose 3.7% year-on-year in September, exceeding the 3.6% forecast, while core inflation came in at 2.6%, also above expectations. The Federal Reserve raised interest rates to 3.75%-4% in September, with officials signalling one more hike this year.

BofA believes gold may bottom only after the Fed exits its tightening cycle. A pause in the dollar’s rally and an easing of concerns surrounding the Iran war could also help the metal recover.

Renewed fears of currency debasement, however, offer another potential route higher. Some traders are already interpreting the bank’s cautious outlook as a contrarian signal.

Suki Cooper, Global Head of Commodities Research at Standard Chartered Bank, said global gold-backed exchange-traded products (ETPs) saw renewed outflows late last week, bringing an end to a period of relatively resilient investment demand, according to a Kitco report.

On the technical front, Cooper said gold needs to hold support at $3,886 an ounce. A sustained break below this level could expose the metal to a much deeper correction.

Although gold is approaching oversold territory, Cooper cautioned that considerable downside risks remain. Elevated energy prices are adding to inflationary pressures and prompting investors to reassess the outlook for US monetary policy.

The metal will need to establish a firm price floor as higher oil prices keep inflation risks in focus and the prospect of further rate tightening weighs on gold, the report added.

Will gold bounce back in 2027?

Despite the near-term headwinds, Standard Chartered remains bullish on gold over the longer term. The bank expects the metal to average $4,650 an ounce in the fourth quarter, with prices rising to $4,850 in the first quarter of 2027.

The positive outlook comes even as expectations of further Federal Reserve tightening remain elevated.

BofA also expects gold prices to recover next year. The bank forecasts prices at $4,750 an ounce in the first quarter of 2027, rising to $5,000 in the second and third quarters.

Goldman Sachs shares a similar longer-term view. The bank cut its end-2026 price target to $4,650 in September but retained its forecast of $5,400 for 2027.

However, not all market experts believe investors should chase gold after its sharp rally. S Naren, CIO of ICICI Prudential Mutual Fund, cautioned against doing so at the ET Wealth Expo, saying he does not expect gold to return to its earlier relative valuation levels.

He attributed this to a fundamental shift in how central banks view their reserves. Following the impounding of Russia’s oil and gold reserves, central banks began reassessing their dependence on currencies such as the US dollar. The episode raised concerns about holding reserves entirely in currencies and encouraged central banks to increase their interest in gold as an alternative reserve asset.

Naren believes this shift could continue to support gold until the underlying issue is resolved. In his view, the structural change means the metal may not see the same degree of mean reversion that investors might expect based on historical trends.

For the remainder of 2026, precious metals are likely to remain highly sensitive to interest-rate expectations, movements in the dollar and global risk sentiment. Gold is expected to retain its strategic appeal as a long-term portfolio diversifier, although a sustained recovery may take time to emerge, experts say.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.