What impact will a sudden plunge in gold have?

Since September 2022, the international gold price has peaked at over 3,500 US dollars per ounce. With the easing of the trade situation and the reduction of other geopolitical risks, the market's risk-averse sentiment has declined somewhat, leading to a decrease in the demand for safe-haven assets such as gold. On the evening of May 14th, the spot gold price continued to decline, falling below $3,180 per ounce and hitting a new low since April 15th. London gold spot and COMEX gold both dropped by nearly 2%, both falling below $3,200 per ounce. The three major U.S. stock indexes opened slightly higher. Subsequently, the Dow Jones Industrial Average and the S&P 500 Index turned green, while the Nasdaq's gains narrowed. As of the time of publication, the Dow Jones Industrial Average was down 0.02%, the S&P 500 Index was down 0.07%, and the Nasdaq Composite Index was up 0.14%.

Although gold has long been regarded as a safe-haven asset, the recent sudden plunge in its price has brought about very complex and multi-faceted impacts on the international economy. The first is the impact on the gold market and the industrial chain. A sharp drop in gold prices will trigger sharp fluctuations in investor sentiment. Short-term investors may suffer losses due to falling prices, their confidence may be undermined, and they may even reduce their investment in the gold market. Long-term investors may view this as an opportunity to buy at a low price, and their confidence is relatively stable. A price plunge may trigger a large number of investors to sell or bottom-fish in a concentrated manner, leading to a significant increase in market trading activity in the short term and intensifying the fluctuation range of prices. Investors need to reassess market trends and their risk tolerance. Some may shift to other asset classes or adjust their gold investment positions to diversify risks. In addition, the sharp drop in gold prices has compressed the profit margins of gold mining enterprises. Some high-cost mines may be forced to reduce production or suspend operations, affecting the overall production capacity of the industry. Gold jewelry processing enterprises are under the dual pressure of declining raw material costs but a wait-and-see market demand. They need to maintain their competitiveness by optimizing processes and adjusting product lines. When the gold price drops, the amount of gold recovered may surge, but a simultaneous decline in the recovery price will dampen consumers' willingness to cash out, resulting in a mismatch between supply and demand in the market.

Second, there is the impact on the financial market. A sharp drop in gold prices can trigger fluctuations in investor sentiment. Some investors may choose to sell their gold to avoid further losses, leading to redemption pressure on derivatives such as gold ETFs. Funds may flow into risky assets such as the stock market and bond market. Gold prices are negatively correlated with the US dollar index. A plunge may trigger a stronger US dollar, exerting depreciation pressure on emerging market currencies. In addition, the decline in gold prices may weaken market concerns over inflation and affect central banks' monetary policy decisions, such as a possible slowdown in the pace of interest rate cuts. For financial institutions holding a large amount of gold assets, a decline in gold prices may lead to asset impairment, affecting their financial condition and stability. Some institutions may adjust their investment portfolios and reduce their gold holdings to lower risks.

Thirdly, regarding the impact on the economy, as a leading indicator of inflation, a sharp drop in gold prices may reflect optimistic expectations for economic growth, encourage consumption and investment, and boost economic vitality. It may also alleviate market concerns over imported inflation and provide room for monetary policy adjustments. However, if the decline in gold prices is due to the easing of trade situations or the reduction of geopolitical risks, its impact may be limited, and it is necessary to be vigilant against the potential risks caused by excessive market optimism. Countries that rely on gold imports and exports may face the pressure of narrowing trade surpluses due to price fluctuations and need to stabilize exchange rates through foreign exchange intervention. The decline in gold prices has weakened the value of gold reserves, forcing central banks to adjust the structure of foreign exchange reserves. Some countries may accelerate the diversification of their foreign exchange reserves, increase holdings of assets such as US Treasuries to hedge risks, and influence the global capital flow pattern. The sharp drop in gold prices may affect consumers' willingness to purchase gold jewelry. Some consumers may accelerate their purchases, but more consumers may adopt a wait-and-see attitude. Meanwhile, the decline in gold prices may also dampen consumers' interest in gold investment, leading to a decrease in investment demand.

To sum up, the sharp drop in gold prices is both a manifestation of economic cycle fluctuations and the result of behavioral games among market participants. In the long term, this fluctuation may drive the reshaping of the global capital flow pattern, the optimization of the monetary policy toolkit and the rebalancing of investors' risk appetite.