Gold Climbs a Staircase, Then Pulls Back From Record Highs

Richard Mills

Gold shone brightly for a while. It moved above US$3,000 an ounce in March 2025, then crossed US$4,000 in October, and then passed US$5,000 in January 2026, when it reached an intraday high of US$5,626.80 an ounce.

For a time, it seemed as though everyone had become a gold bug. Analysts at Deutsche Bank and JPMorgan Chase & Co., among others, expected the metal to move next toward US$6,000 an ounce as the rally continued.

Instead, the advance has faded sharply, giving the impression that gold behaved like an over-owned stock that eventually felt gravity’s pull.

From its highs near the beginning of the year, gold has fallen by more than US$1,600. At just below US$4,000 an ounce early Friday, it was trading at nine-month lows.

By the look of it, investors have moved on.

A July 17 op-ed in the Globe and Mail reflects a common mainstream view of gold. Because it pays neither interest nor a dividend, gold is often dismissed as an investment and cast instead as emergency insurance against the unthinkable, such as a currency collapse. As that column put it, gold’s “traditional role as a hedge against calamity” is where it belongs.

Some readers also reject the idea of owning gold altogether, or returning to the “barbarous relic,” the term John Maynard Keynes used in his 1924 book on monetary reform to suggest that the gold standard had outlived its usefulness.

Still, the facts are worth laying out. Gold has indeed fallen sharply from its January 2026 record high of $5,626. As of this writing, the metal is trading at $4,045, a decline of $1,581, or 28%, in roughly six months.

Source: Trading Economics

The decline has been driven by a stronger U.S. dollar, expectations that the Federal Reserve will raise interest rates, and liquidations as investors rotate into higher-yielding assets. For a metal that does not pay income, the move has renewed an old debate: gold can look unappealing when cash and bonds offer better returns, but its relative appeal changes when inflation and policy uncertainty start eroding those returns. The main reasons cited for the retreat from January’s record high include:

• Hawkish interest-rate expectations: Rising oil prices have revived inflation concerns, and markets are pricing in a high probability of Fed rate hikes to counter those pressures. Higher rates increase the appeal of cash and bonds while weighing on non-yielding assets such as gold.
• A stronger U.S. dollar: Gold is priced in U.S. dollars. Recent economic data and a hawkish Fed tone have lifted the dollar, making gold more expensive for international buyers.
• Liquidity and profit-taking: After the record run that pushed gold above US$5,500 an ounce earlier this year, many investors took profits. There has also been market speculation that some central banks in the Middle East sold gold reserves during the Iran conflict to raise cash.

Gold’s recent volatility, however, should be viewed in a longer historical context. Over the past 50 years, the price has risen and fallen, but it has mostly risen.

For years, the price was fixed at $35 an ounce while U.S. monetary policy pegged the dollar to gold. In 1971, President Nixon removed that peg, ending the gold standard. Gold then rose from about $40 to about $662 by mid-1980. It traded sideways for many years after that, then gradually declined to $259 in March 2001.

From there, gold staged an 11-year advance and reached 1,728 in November 2012 before pulling back. By November 2015, it had fallen to $1,065. That bear market shook out many investors, but the metal was not finished. From $1,065, gold climbed to $1,971 in July 2020, dipped to $1,623 in October 2022, and then rose to its most recent peak of $5,626 at the end of January 2026.

The larger picture shows gold rising from $35 in 1971 to $5,626 over 55 years, a gain of about 160 times, or +$15,900%.

Each time gold has climbed to a new step, it has set a fresh high. Each time it has fallen, the low has remained above the previous low. In 50 years, gold has never crashed through a prior low. Every high has been higher than the last, and every low has also been higher than the last.

Source: Macrotrends/AOTH

That long-term pattern has unfolded alongside a massive expansion in debt since Nixon’s decision to move the world into a purely fiat monetary system. Without a hard-asset constraint like gold limiting money creation, total global debt has surged to nearly $353 trillion, while government debt in developed economies alone has climbed toward a record $75.8 trillion.

To gauge whether gold may have already bottomed, one approach is to calculate the average decline from high to low across prior cycles and compare it with the current move. Using the periods highlighted in this article:

• November 1975 high of $171 to September 1976 low of $116 = 47%
• November 2012 high of $1,728 to November 2015 low of $1,065 = 62%
• July 2020 high of $1,971 to October 2022 low of $1,623 = 21%
• January 2026 high of $5,626 to current $4,045 = 28%

The average decline across those four periods is 39.5%.

A move from $5,626 to $3,963 would equal a 28% decline.

The geopolitical backdrop is also important. A fragile ceasefire collapsed between the U.S. and Iran, and since July the war has resumed. U.S. casualties are rising. ABC News reported that scores of American troops have been injured and at least four service members have been killed in escalated attacks in the Middle East.

Those deaths and injuries over the weekend brought the total to at least 18 U.S. service members killed since the U.S. and Israel launched strikes against Iran on Feb. 28, with roughly 500 wounded, according to Defense Department figures, including an updated casualty count provided Monday by Pentagon spokesman Sean Parnell.

On Thursday, Trump threatened a “massive attack” against Iran on a scale larger than previous strikes. That followed an earlier warning of “major military punishment” against Iran and the Houthis after the Iran-backed Yemeni militia attacked two Saudi Arabian oil tankers in the Red Sea, according to The Guardian.

The Houthis also closed the Strait of Bab el-Mandeb earlier this week, a strategic waterway at the entrance to the Red Sea through which about 12% of global commerce flows. The Strait of Hormuz remains effectively closed.

Crude oil again crossed the $100 threshold Thursday, reviving inflation concerns and renewed talk of U.S. interest-rate hikes to cool an overheating economy.

Earlier, this article described “economic price shocks” as the main force behind current inflation. The assumption was that if the war were close to ending, inflation would return toward its pre-war level and continue lower.

(Monetary inflation vs. ‘economic shock’ price increases — Richard Mills)

That framing also reflects the thinking of new Fed Chair Kevin Warsh, a monetarist who believes excessive money-printing causes inflation and prefers “trimmed averages” that exclude outlier price rises or declines, including oil shocks.

Now that the Middle East war is intensifying again, the question is how long it will take for the market narrative to shift from inflation, rising rates, and a stronger dollar to a war narrative. That kind of narrative would be negative for the broader economy, but it would likely support gold by attracting safe-haven demand. If oil prices remain elevated, however, inflation could spread through the global economy and force central banks to raise interest rates, which is usually unfavorable for gold.

The answer also depends on the global bond market, which is estimated at roughly $140 trillion in total debt outstanding, with the U.S. accounting for about 40% of that. The market is around three times the size of the global equity market.

Gold and bonds are both considered safe havens. If a long-term bond yields 4.5% and inflation is negligible, why buy gold? The calculation changes when inflation rises. Gold becomes more attractive when net yields — yields minus inflation — are negative or close to zero. If inflation consumes most of a bond’s return, bullion can become the more appealing choice.

U.S. long-term bond yields remain elevated. The Fed controls only the overnight rate, along with the discount rate and interest on reserve balances. Prime rates, consumer loans, and savings accounts move with the overnight rate, but longer-dated rates such as mortgages and the 10-year Treasury are driven more by market expectations, inflation, and global demand than by direct Fed control.

Demand at Treasury auctions remains solid, as shown by bid-to-cover ratios. The 10-Year Note came in at 2.59x, up from 2.57x; the 20-Year Bond was 2.64x, stable and in line with the 10-auction average of 2.65x; and the 30-Year Bond was 2.44x, above the historical auction average of 2.43x and consistent with robust international participation.

Even so, yields are grinding higher auction by auction because buyers are not stepping in aggressively at the start of bidding and are instead allowing the bidding process to push up the offered rate.

A large share of the U.S. bond market is held by foreign investors, including central banks, which buy sovereign U.S. debt for foreign-exchange reserves because it is highly liquid and provides access to U.S. dollars needed to buy commodities and other goods and services priced in dollars.

The question is when foreign investors stop buying U.S. Treasuries.

Some countries have already slowed their purchases, including major holders such as China and Japan, and more recently Saudi Arabia, India, the UAE, and even Canada. Last year, for the first time since the mid-1990s, gold surpassed U.S. Treasuries in central bank reserves.

U.S. sovereign-bond investors are focused on three concerns: servicing the massive $39 trillion debt, the widening deficit, and real interest rates that are approaching negligible or zero.

Debt financing is becoming a major problem for the U.S. government. The Treasury effectively prints money for the Federal Reserve to buy short-term debt. The Fed is reportedly buying $40 billion worth of short-term Treasury bills each month.

Even the shortest-term Treasury bill, the 4-week bill, pays 3.75%.

Source: Trading Economics

The difficulty for the Fed is that maturing debt keeps rolling over even as yields rise and interest costs mount. According to the American Enterprise Institute, the U.S. government is rolling over about $9.2 trillion of maturing debt, plus $1.7 trillion in new deficit financing, for total issuance needs of $10.9 trillion.

Mid 2026/Mid 2027

Because the U.S. Treasury relies heavily on short-term bills, roughly 34% of all outstanding marketable U.S. debt matures and must be refinanced within a year.

A wave of debt totaling up to $17 trillion through 2028 must be rolled over as older pandemic-era bills and notes expire. Much of that money was originally borrowed at rates near 2%. Refinancing now takes place in a market where 2-year yields are around 4.3%.

The U.S. federal budget deficit is projected to rise from $1.9 trillion in fiscal 2026 to more than $3.1 trillion by 2036, driven mainly by rising net interest payments on the national debt, mandatory spending, and military spending.

The U.S. has the largest nominal national debt of any country at $39 trillion. Although its debt-to-GDP ratio of 122% is below Japan’s 204% and Singapore’s 172%, economists are concerned about the absolute level of U.S. debt because it limits the tools available to the Federal Reserve.

As Fortune wrote, Apollo chief economist Torsten Slok warned that the pace of U.S. debt accumulation — about $7 billion per day — is eroding the country’s ability to respond to a recession. The U.S. cannot easily add stimulus through tax cuts or infrastructure spending without digging the hole deeper. At the same time, the Fed cannot cut rates too aggressively to encourage borrowing without risking higher inflation and disturbing the demand balance for new bonds.

US government spending is increasingly difficult to finance. The only practical way for the government to pay for that spending is to print money and for the Fed to buy short-term debt. Two things are likely to follow.

First, money eventually finds its way into the economy and fuels inflation. That has not happened fully yet — the chart below shows the velocity of money, M2V, leveling off around Q4 2025 — but the fear of rising rates may encourage people to spend cash faster instead of saving it.

Source: Trading Economics, Velocity of M2 Money Stock reached a record high of 2.19200 in July 1997 and a record low of 1.12600 in April 2020

Second, inflation could continue rising because of the war. U.S. CPI inflation was 2.5% in February 2026, the month the war began. By May, it had risen to 4.2%. A brief prospect of peace in June pulled CPI down to 3.5%, but inflation now appears to be rising again as oil moves back toward $100 a barrel.

Source: Trading Economics

Investors are demanding higher yields on long-term U.S. bonds. The deficit is approaching $2 trillion, while the U.S. federal government collects about $5.23 trillion in a typical recent fiscal year. The scale of spending is enormous, and the government’s ability to meet it depends heavily on money creation.

That has raised concerns about the government’s ability to finance its own deficits and debt, while bond investors are also worried that inflation will erode the value of their returns. If that happens, the argument goes, confidence in U.S. Treasuries could weaken further.

Real interest rates

The benchmark 10-year Treasury yield is currently around 4.7%, while CPI inflation is 3.5%, leaving a net yield of 1.2%. If inflation climbs back to May’s 4.2% level, the net yield would fall to 0.5%.

Who would want to lock in a 10-, 20-, or 30-year bond for half a percent or less in real return? Real interest rates are moving toward negative territory.

Gold demand tends to move inversely to interest rates. When interest rates are higher, demand for gold is lower. When rates are lower, demand for gold is higher.

The reason is straightforward: when real interest rates are low, at, or below zero, cash and bonds lose appeal because their real return is below inflation. If an investor earns 1.6% while inflation runs at 2.7%, the real return is negative 1.1%, meaning purchasing power is being lost. Gold is one of the few assets with a long record of preserving or increasing purchasing power as its price rises.

Bond and gold observers therefore watch U.S. Treasury yields closely, especially the benchmark 10-year note. It acts as a proxy for other financial products, including mortgage rates, and it also reflects investor confidence.

Historically, the link between negative real interest rates and gold is clear. In The Golden Dilemma, Claude Erb and Campbell found a near-perfect negative correlation of -0.82 between real interest rates and gold prices from 1997 to 2012.

Looking further back, gold surged in the second half of the 1970s when real interest rates turned negative and reached as low as -6%. When Paul Volcker, the Fed chair under Presidents Carter and Reagan, raised short-term nominal rates, real rates turned positive and gold’s advance ended. The price then drifted lower, reaching a 30-year low below $400 an ounce in 2001.

The 2010 to 2013 gold bull market is also visible alongside negative real rates, which bottomed at around -4% during that period.

In the FRED chart referenced in the original article, gold from 2013 to 2020 did not move above $1,400, a period when the real yield on the 10-year Treasury was roughly between 0% and 1%. When real yields went negative, as they did around 2011-13 and again in 2020, gold prices jumped.

Gold prices rise when real yields go negative. Low or negative real rates make it difficult to suppress demand for gold. There is an old saying that “six percent interest can draw gold from the moon,” and real rates below two percent tend to draw investors toward gold.

Conclusion

Gold has been rising and falling for the last 50 years, but mostly rising. Since 1971, it has climbed from $35 to $5,626, a gain of about 160 times, or +$15,900%. Every high has been higher than the previous high, and every low has been higher than the previous low.

Gold’s latest decline from its January 2026 peak was driven by a stronger dollar, expectations of Fed rate hikes, rising inflation linked to the Iran war, and liquidations as investors moved into higher-yielding assets.

The key question is whether gold has bottomed. If not, when will it?

The average decline from high to low in the four periods highlighted earlier is about 39.5%. A drop from $5,626 to $3,963 would represent a 28% decline, which suggests there may be room for further weakness.

At the same time, the war has widened. The closure of Bab el-Mandeb and the continued restrictions around the Strait of Hormuz mean the options for moving oil and other key commodities out of the Persian Gulf are limited. Those commodities include LNG, fertilizer, and sulfur used in mineral processing.

As war-related price shocks work through the U.S. economy and potentially develop into more persistent inflation, pressure for higher interest rates is likely to increase. Higher rates are usually viewed as negative for gold because the metal competes with interest-bearing assets such as cash and bonds.

But history shows gold can perform well in rate-hike cycles. Across 13 Fed rate-hike cycles over the past 55.5 years, gold posted average gains of 27.2%.

Gold also tends to perform well when real interest rates turn negative, meaning the 10-year Treasury yield minus inflation falls below zero. That is not yet the case, but it is getting closer. The 10-year yield is around 4.7%, and CPI inflation is 3.5%, leaving a net yield of 1.2%. If inflation returns to its May level of 4.2%, the net yield would fall to 0.5%.

At the start of this article, a mainstream media column was cited that criticized gold. While much of that argument was rejected here, one line was endorsed: “Gold is down. And now the case for owning it looks a whole lot better.”

Richard (Rick) Mills

aheadoftheherd.com

About the author

Richard Mills

Richard (Rick) Mills

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