Why Is Gold Falling When the World Looks Like It's Falling Apart?

Jimmy Wong

Gold broke below US$4,000 an ounce on Friday for the first time since July. It dipped to about US$3,975 and finished the week just under the line, near US$3,996. That is a fall of about 4%, its worst week since June. Silver fell harder, to about US$54. In Australian dollars, gold is around A$5,700.

If that feels backwards, you're not alone. France has had its worst riots in years, and its borrowing costs are the highest since 2002. Oil is at a five-month high. AI shares are wobbling. Isn't this exactly when a safe haven should shine? Let's look at what actually happened.

Why didn't France's debt scare help gold?

In theory, it should. France owes about 119% of what its economy produces in a year, and its divided parliament is struggling to pass a budget. When investors doubt a government can fix its finances, gold looks better, because no government can print it.

But that is a slow-burn reason. In the first days of a scare, big investors run to US dollars and top-rated German and US government bonds, which pay about 3.4% to 5% a year. Gold pays nothing. France's troubles also helped push the euro to a 17-month low this month, which lifted the US dollar and made gold dearer for everyone else.

So who is selling?

Not the long-term holders. Gold funds took in a record US$31 billion last quarter, including about US$10 billion in September while the price fell, and they have kept adding in October. The selling is coming from elsewhere:

• Investors raising cash. AI tech shares fell sharply on Thursday. Bonds of CoreWeave, which rents out AI computing power, now yield near 16%, a level that usually signals serious trouble. Investors who borrowed to buy shares faced margin calls, which are demands to put up more cash. Someone who needs money fast sells the jewellery first, because it is easy to sell and still worth more than they paid. Gold is that jewellery.
• Futures traders. Big speculators have been cutting their bets on higher gold for weeks, and oil is the reason. Brent crude reached about US$117 a barrel on Friday as attacks on Gulf shipping continued, and US households now expect 4.7% inflation over the next year. That keeps a December Fed rate rise in play, and higher rates make an asset that pays no interest less attractive.
• Russia. Its central bank sold gold for a tenth straight month in September to help pay for its budget.

Here is the tell. On Thursday, US bond yields fell, which normally helps gold, and gold fell anyway. That looks like people raising cash, not a change in the reasons to own gold.

Could gold fall further?

Yes, and it's worth being ready for that. None of these pressures has gone away. If AI shares slide again, more investors will sell gold to raise cash. If oil keeps climbing and the Fed raises rates in December, the pressure could last for weeks or even months. Owning gold through this means accepting some short-term pain.

Has this happened before?

Yes. In March 2020, as COVID hit, gold fell more than 10% in under two weeks while investors scrambled for cash. Five months later it set a record above US$2,000. In 2008, as banks collapsed, gold fell nearly 30% between March and October, then climbed to about US$1,900 by 2011. History is a guide, not a promise, but it shows gold is often sold first in a panic and rewarded later.

Is the long-term case still there?

Yes, and this week arguably made it stronger. Start with the debts behind the scare. France's interest bill is set to jump from about €79 billion this year to €91 billion next year, and its debt is still growing faster than its economy. Higher rates make debts like this harder to carry, not easier. Governments rarely pay off debts this size. More often, they lean on inflation and central bank help, which slowly shrinks what each euro or dollar buys. That is exactly what gold protects against.

The "safe" option is changing too. France now pays more to borrow than Italy, once seen as the riskier country. When government bonds become the worry, gold stands out because it isn't anyone's debt, so no one can default on it. And rate rises driven by oil can't run forever, because they slow the economy. When rate fears ease, the forced sellers will be gone, but the reasons to own gold will still be there. Meanwhile, the steady buyers haven't left: China's central bank has bought gold for 23 months in a row.

Where are the levels to watch?

The early-October low of US$4,086 has given way, and so has US$4,000. Next are about US$3,950, then US$3,890. On the way back up, about US$4,075 is the first hurdle. When the reasons to own gold haven't changed, buying in stages matters more than catching the exact bottom.

What would be a warning to sell?

The price break has happened, but two other signs haven't: gold funds turning to steady selling, and central bank buying drying up beyond Russia. Until those follow, this is a watch signal, not a sell signal. The next tests are the Fed meeting on 27–28 October and US inflation data on 29 October.