The core logic behind the sharp decline in gold: the dollar, the dollar, and still the dollar!

After experiencing a year-long bull market, gold prices have significantly retreated, marking the longest consecutive sell-off in months, with oversold levels reaching the most severe in over a year. The decline may highlight that the dollar remains the "king of all." Recently, gold prices have rapidly fallen, with a 7-day decline being the largest since the pandemic. Gold prices have fallen below the 50-day moving average and are about to break through the critical 100-day moving average support level, with oversold levels also reaching the highest since September of last year. Market opinions on the decline in gold prices are mixed. One explanation is the buying of "Trump presidency" rumors and selling of facts. Some analysts suggest that gold has been affected by the recent sharp decline in the Indian stock market, leading to a weakened wealth effect and a subsequent decrease in gold demand. Deutsche Bank's Head of FX Strategy, George Saravelos, believes that the fundamental reason is still the dollar, and he remains bullish on gold in the medium term. He outlines three core reasons for the recent decline: The market is not worried about U.S. credit risk. If the market begins to worry about the excessive fiscal deficit, fiscal dominance, and the loss of independence of the central bank in the U.S., gold prices will rise first. This is also reflected in the mild trends of U.S. term premiums and inflation breakeven points. The trend in gold prices confirms the argument that "the U.S. is not at risk of a dual deficit currency crisis in the short term." Demand for gold reserves from central banks is declining. The reason is simple: Trump's policies may put depreciation pressure on many emerging market currencies. Many central banks now need to use their dollar reserves to protect their currencies from capital outflows and prevent excessive depreciation. Central banks in Asia now have to use more dollars to defend their currencies, which may reduce demand for gold. The dollar remains the preferred safe-haven currency. Some believe that the appeal of the dollar is structurally declining, with sanctions and trade weaponization being the main driving factors. Our view is the opposite: while public sector demand for dollar assets may be declining, private sector demand has been rising. More importantly, the greater the risk of government sanctions from the U.S., the greater the net demand for dollars. Therefore, the trend in the dollar price since the U.S. election victory not only aligns with the rising demand for U.S. assets (demand for U.S. stocks globally) but also with the rising demand for safe-haven assets (the dollar rising against all global currencies and gold)