After the big drop, gold will no longer be a "high cost-performance global asset" in the short term

After experiencing a sharp rise for nearly two months, gold has recently suddenly turned into a steep decline, with volatility soaring. In the midst of this chaos, where should investors go?

In the latest report released by Shenwan Hongyuan Research on October 24, it was pointed out that in the short term, gold is no longer a wise choice. As "going long on gold" has become the most crowded trade according to a Bank of America survey, highly leveraged gold ETF positions have begun to burst, leading to a rapid retreat in prices from historical highs. The current high volatility severely erodes its risk-reward ratio.

Historical experience also shows that the starting point of each major upward wave in gold is almost always accompanied by a return of volatility to the low levels before the surge began. Shenwan Hongyuan stated that allocation funds should wait for the $3,800-$3,900 per ounce area to accumulate positions on dips, while trading funds should wait for volatility to fall back to low levels before entering the market.

In the medium to long term, quantitative models indicate that the central price of gold will be $4,814 per ounce in 2026, and gold still has allocation value.

A decline in volatility is a prerequisite for the new market trend, and $3,800-$3,900 is the bottom area

For different types of investors, the report provides differentiated advice. For trading funds seeking short-term gains, the best strategy is to remain on the sidelines and wait for volatility to significantly decline before entering the market, as the profit and loss in a high-volatility environment are relatively low. For long-term allocation funds, the current time is to wait for the opportunity to accumulate positions on dips, with $3,800-$3,900 per ounce being the fundamental bottom area for the second half of 2025, which can serve as a key buying reference.

Specifically, Shenwan Hongyuan stated:

Reviewing the breakthrough trends of gold in May 2019, July 2020, March 2024, and February 2025, an important rule was discovered: the return of volatility to pre-surge low levels is a prerequisite for the start of a new upward or downward trend. This means that in the current high-volatility environment, it is difficult for new trends, whether upward or downward, to form. Investors need to patiently wait for volatility to decline from high levels before a better entry opportunity arises.

For allocation funds, one should wait for opportunities to accumulate positions on dips. Shenwan Hongyuan's strategy gold quantitative model fits the central price of gold based on macro fundamentals, showing that under neutral assumptions, the central price of gold in the second half of 2025 will be $3,886 per ounce. Therefore, the $3,800-$3,900 per ounce area can serve as a good bottom reference for the year. This price range represents the fundamental support level for gold prices, providing a clear reference point for allocation funds

Long-term Fundamentals Remain Bullish: Gold Price Center Expected at $4,814 in 2026

Despite facing adjustments in the short term, gold is still expected to continue reaching new highs in the medium to long term. Shenwan Hongyuan's research quantitative model shows that the gold price center in 2026 is projected to be $4,814 per ounce, with the main supporting factors including:

Fiscal Policy Dimension: Under geopolitical fluctuations, global fiscal deficits are expected to continue rising. The fiscal deficit rate in the Eurozone is projected to continue increasing, with Germany and France expected to have the largest upward potential in deficit rates in 2026, at 0.52% and 0.48%, respectively. Global central banks and allocation funds are marginally reducing their risk exposure to ultra-long-term U.S. and European government bonds, which will benefit gold.

Monetary Policy Dimension: The Federal Reserve is expected to maintain an accommodative monetary policy. Trump's interference with the independence of the Federal Reserve will lead to a decline in overall market risk appetite, while Trump's inclination towards interest rate cuts will also favor gold's continued upward movement in the medium term. The gold price and the real yield of 10-year U.S. Treasury bonds are expected to maintain a good negative correlation in 2025.

Central Bank Gold Purchasing Trend: The amount of gold purchased by global central banks remains stable, and global central bank gold reserves continue to rise. Against the backdrop of escalating debt risks in Europe and the U.S., it is crucial for sovereign funds and central banks to control their risk exposure to long-term U.S. and European government bond assets. The trend of central banks, led by China, purchasing gold is expected to continue in the future, supporting the long-term strategic allocation value of gold.