Pullback does not end the bull case
Gold’s recent decline should be viewed as a move back toward fair value, not as the end of its long-term bull market, according to Nitesh Shah, Head of Commodities and Macroeconomic Research at WisdomTree.
After a volatile start to the year, Shah said the precious metal still has room to recover as markets may be overestimating how aggressively the Federal Reserve will raise interest rates following its hawkish June policy guidance.
Rate hike expectations may be too aggressive
In an interview with Kitco News, Shah said the market has become too forceful in pricing future monetary tightening.
He described expectations as having moved too far, saying the “market’s gotten a little bit ahead of itself.”
Although inflation remains high and the labor market continues to show resilience, Shah argued that the broader economic picture has not changed enough to justify the scale and speed of rate increases now implied by investors.
Balance sheet reduction could do part of the work
Shah said investors may be placing too much emphasis on policymakers’ rate projections while underestimating the tightening effect of a shrinking Federal Reserve balance sheet.
If the central bank moves aggressively to reduce its holdings, that action would tighten financial conditions by itself and could leave less room for repeated interest rate hikes.
In his view, balance sheet reduction may reduce the need for the Fed to deliver as many rate increases as the market currently expects.
Debt burden limits hawkish policy
Shah also questioned whether the Fed can maintain an extended hawkish stance given the United States government’s rising debt load.
Higher rates increase the cost of servicing government debt, which could eventually create financial and economic stress.
He warned that pushing policy too far could force the central bank to reverse course quickly if tighter conditions trigger recessionary pressures or instability in the financial system.
Correction follows earlier froth
Rather than interpreting gold’s decline as the start of a deep bear market, Shah characterized it as a healthy adjustment.
He said prices had become stretched earlier in the year after speculative enthusiasm pushed gold well above levels justified by fundamentals.
The subsequent pullback, in his view, has removed much of that excess.
Gold now closer to fair value
Shah’s valuation model for gold includes bond yields, the U.S. dollar, inflation and speculative positioning.
According to that framework, gold was trading at an unusually large premium to fair value in January.
That gap has now largely closed, leaving prices much more aligned with his model.
He said gold is no longer significantly disconnected from fair value, which could create a more stable base for the next move higher.
Macro backdrop could support recovery
WisdomTree sees upside potential for gold if inflation stays elevated, bond yields move lower and the U.S. dollar weakens.
Those conditions would typically improve the appeal of bullion, especially for investors looking for protection against currency depreciation and inflation risk.
Shah said the long-term direction of the dollar remains one of the most important variables for gold.
Dollar strength may prove temporary
The dollar has strengthened in recent months as traders have priced in a more hawkish Federal Reserve.
Shah, however, believes that strength may not last.
He said the “structural story for dollar depreciation still is there,” pointing to persistent U.S. budget deficits and current account imbalances as forces that could eventually pressure the greenback.
He also suggested that expectations for higher Fed funds rates may be misplaced, which would weaken one of the main supports behind the dollar’s recent advance.
Inflation pressure could moderate
Shah expects easing geopolitical tensions and better global energy supplies to help reduce inflation pressure over the medium term.
If inflation begins to cool, the Federal Reserve may have less need to maintain an aggressive tightening path.
That would improve the outlook for gold, which often benefits when real yields decline or when investors anticipate looser monetary conditions.
WisdomTree keeps bullish forecast
Despite the recent weakness, WisdomTree remains bullish on bullion over the longer term.
The firm expects gold prices to be 25% higher by the first quarter of 2027.
Shah said a move above $5,000 remains “easily achievable.”
Central banks remain key buyers
Shah acknowledged that the extraordinary buying momentum seen earlier this year may not return immediately.
Even so, he said structural sources of demand remain strong, especially from central banks.
He cited the World Gold Council’s latest reserve manager survey, which showed a record share of respondents planning to increase gold holdings over the next year.
With prices now lower than their earlier highs, Shah said central banks may have even more reason to continue accumulating bullion.
Strategic demand still intact
Shah said long-term investors should separate short-term trading moves from gold’s strategic role in diversified portfolios.
Some investors treat gold as a core allocation, while others add larger tactical positions when market conditions appear favorable.
He also noted that WisdomTree has seen more inflows into its gold products recently, possibly because the metal has become more attractively priced after the correction.
