Behind this round of gold falling more than 20% from its historical high and entering a technical bear market is by no means a simple short-term emotional sell-off, but a valuation reconstruction brought about by a deep shift in the global interest rate system. When the legendary institution that has been bullish on U.S. debt for more than 30 years officially changed direction, consensus on an upward trend in long-term interest rates is rapidly gathering. This directly raises the holding cost of zero-interest gold and becomes the core macro headwind that suppresses gold prices. Superimposed on the warning signals that the technical surface is highly similar to the historical peak, gold is undergoing a level adjustment in a long-term rise, and the depth and rhythm of the adjustment will also be tied to the depth of U.S. bond interest rates.

The legendary shortfall in the bond market: the underlying macro logic of gold’s pressure

As an asset that does not generate interest income, gold's pricing has always been highly negatively correlated with U.S. Treasury yields. The deep root cause of the recent continued pressure on gold prices is the systematic rise in long-term interest rates, and the change of stance of Hoisington Investment Management is precisely the most iconic signal of this trend. This fixed-income institution, known for being firmly bullish on U.S. Treasury bonds for more than 30 years, has significantly compressed the effective duration of its funds from 20.88 years at the end of September last year to less than 1 year, which is far lower than the benchmark level of the Bloomberg U.S. Aggregate Bond Index of about 6 years. In essence, it has completely confirmed the judgment that "long-term inflation and interest rates will rise simultaneously." This judgment constitutes the core macro suppression of gold at present.

Hoisington pointed out in the quarterly report that the expansion of the fiscal deficit and the increase in capital demand constitute a broader structural background. The long-term equilibrium range of inflation is moving upward to 3.5%-4.5%, and there is a high risk of a periodic breakthrough of 5%, which will push long-term Treasury yields to continue to rise. For gold, this means a systematic increase in the opportunity cost of holding: when risk-free U.S. bonds can continue to provide a yield of about 5%, the allocation attractiveness of zero-coupon gold will naturally decline in stages, and the flow of funds from the precious metal market to the bond market will become inevitable. At the same time, the U.S. government's financing of fiscal deficits and companies' leverage for artificial intelligence investments are simultaneously pushing up bond supply. The imbalance between supply and demand will further push up yields. This process will also suppress gold in the long term.

The impact of the continued expansion of debt scale is more two-sided. On the one hand, debt expansion has pushed up U.S. debt risk premiums, driven up interest rates, and suppressed gold prices in the short term; on the other hand, the accumulation of sovereign credit risks is precisely the core support for gold's long-term value. It’s just that at the current stage, the cyclical force of rising interest rates is dominant, and the market is more concerned about the income advantage of U.S. debt rather than the hedging demand for debt risks. This is also the core reason why gold has never triggered safe-haven buying as geopolitical conflicts continue to heat up. Investors are more worried that the situation in the Middle East will push up oil prices and exacerbate inflation, which will in turn force the Federal Reserve to maintain high interest rates, which will ultimately be negative for gold.

Macro and technical resonance, the adjustment cycle has not yet ended

The macro headwinds of rising long-term interest rates, combined with short-term policy and geopolitical catalysts, and resonance with bearish technical signals, have made the level of this round of gold adjustment significantly higher than previous ordinary corrections. At present, the adjustment process has not yet ended. In the short term, the escalating situation in the Middle East is continuing to suppress gold through the chain of "oil prices - inflation - interest rate hikes". The U.S.-Iran conflict has escalated again recently. The U.S. military has restarted a naval blockade of Iranian ports and launched continuous air strikes on coastal defense facilities. The dispute over the Strait of Hormuz waterway continues to ferment, pushing crude oil prices up as a whole. However, rising energy prices did not drive gold safe-haven buying, but instead further raised the market's inflation concerns. The CME Group's Fed Watch Tool showed that traders priced in a 25 basis point interest rate hike in September. The probability has risen to 51%. Federal Reserve Chairman Warsh reiterated his commitment to suppressing inflation, which further strengthened the market's expectations that high interest rates will be maintained for a longer period of time. The upward revision of short-term interest rate expectations continues to put downward pressure on gold prices.

Technical signals further confirmed the depth of the adjustment. After comparing historical trends, the Bank of America technical strategy team found that the current correction characteristics of gold are highly similar to the bear markets after the two historical tops in 1980 and 2011: the formation of a death cross pattern, the emergence of a top warning K-line, the TD sequence indicator sending a trend exhaustion signal, and the relative strength index once rose to 90 at the previous high, which is completely consistent with the characteristics of the two historical tops. Bank of America pointed out that this round of rising prices has lasted for 121 weeks, but the current adjustment has only been carried out for 24 weeks, which is still insufficient in the time dimension; although gold prices have fallen below the 38.2% Fibonacci retracement level of $4,149, but with reference to the rule that three major bear markets since 1970 have given back at least 50% of their previous gains, gold prices still have room to explore further, and the core downward targets for calculation include the 50% retracement level. The 174-week model corresponds to $3,702 and $3,605, which may drop to $3,315 in extreme cases.

Periodic adjustment rather than trend reversal, batch layout window opened

Although the short-term pressure is clear, this round of correction is essentially a secondary adjustment in the long-term rise, rather than a complete reversal of the trend. There is also a limit to the rise in bond market interest rates, which also determines that gold's decline will not be a unilateral trend. Bank of America judges that gold is more likely to repeat the trend after peaking in 2011 - first rebounding to the 4325-4500 US dollars range, and then re-testing the core support level, rather than continuing to fall all the way.

In the long term, the core logic supporting gold has not disappeared due to rising interest rates. The debt expansion and out-of-control fiscal deficits that Hoisington is worried about are precisely the core long-term benefits of gold - when the credit risk of sovereign currencies continues to accumulate, the hedging value of gold as a credit-risk-free asset will only become more prominent. Coupled with the continued gold purchases by global central banks and the steady advancement of the de-dollarization process, gold's long-term pricing center still has upward momentum. The current adjustment is more of a phased repair of the valuation level than a complete reversal of fundamentals. Overall, the headwinds of rising short-term U.S. bond interest rates are still there, and it is not advisable to rush for a one-time dip. However, as prices gradually fall, the cost-effectiveness of gold's mid- to long-term allocation is continuing to improve. It is currently a better choice to grasp the pace of adjustment and deploy in batches.