Why is gold falling, and what is the next opportunity?

Ask AI · What is the deep relationship between gold’s decline and changes in interest rates?

Wen Zeping Macroeconomics

Recently, gold has fallen sharply, with a cumulative drop of 10% over the past three months. Why, when many are looking for reasons, does gold not rise but fall amid geopolitical wars? When everyone is searching for explanations, we already withdrew early and laid the groundwork for the next new direction.

1. The logic of gold pricing has changed

In 2021, I predicted “building a base allocation to gold.” The three reasons were: the Federal Reserve cutting rates, a weak dollar, and geopolitical turmoil. Now, all three of those logics have changed.

Due to the oil crisis, inflation expectations have risen significantly. The recent U.S. PPI data showed a sharp surge, which means that the Federal Reserve’s rate cuts are likely to be delayed, and even some institutions predict that the probability of the Federal Reserve turning toward rate hikes in October is as high as 50%. Oil is the lifeblood of industry, the mother of inflation. Recently, the costs of fuel, aviation, agricultural products, food, chemical products, clothes, and more have all been rising.

Since the oil crisis, the U.S. dollar index has quickly risen from 95 to around 100; what used to be a weak dollar has turned into a strong dollar.

“Buy gold in chaotic times.” Gold has a safe-haven attribute, but safe-haven assets also include the U.S. dollar, energy, and other assets. At present, the gold price is not only relatively expensive, but also deviates significantly from its historical center.

Because of the oil crisis, the pricing logic of gold has undergone a major change: market concerns about the outlook for global inflation have intensified. Since gold does not generate interest income, gold often performs better in low-interest-rate periods, because the opportunity cost of holding gold is lower; whereas when interest rates rise, gold’s appeal to capital clearly declines, while the appeal of assets that can rise in price—such as energy and chemical and agricultural products—goes up.

2. Buy when no one is asking, sell when the crowd is roaring

Based on more than 20 years of hands-on experience, remember one thing forever: don’t chase high prices. Chasing high prices with hindsight will inevitably get you trapped. This is the main reason most people lose money in the market.

The right approach is: lay the groundwork in advance, buy at low levels, make advance predictions about catalysts, nail the timing, and wait patiently for the payoff. Buying cheap is the hard truth.

At the end of last year, I made an internal prediction: “the third stage of the Year of Commodities—energy,” and when gold was being chased and touted by too many people, I put forward “a well-meant reminder: for gold in the short to medium term, it’s expensive.” You can replace gold with energy. And I emphasized it multiple times—the view is being validated. Knowledge changes destiny.

3. Pre-judge in advance and lay the groundwork for the next new direction

Earlier this year, when gold was being overhyped by the market, we withdrew early and laid the groundwork for energy.

After energy prices surged recently, when everyone started discussing energy, my new view on energy changed as well. I proposed: fight while withdrawing, lay the groundwork for the next new direction.

The market is like that: it has its规律, its charm, and also its ruthlessness. If you want to achieve results that are different from others, you need thinking that’s different. Following the crowd is definitely not enough, because most people in the market lose money—if you follow the crowd, you will inevitably lose. Four types of thinking are crucial: macro thinking, cyclical thinking, contrarian thinking, and marginal thinking.

In our line of work, getting the right things done matters more than being diligent. If the direction is wrong, all your effort is wasted. Direction determines everything, and choosing is better than working hard.