Gold has touched all-time high many times during the past few weeks. The traders and market experts bullish on Gold always find a reason for this unprecedented rise in Gold prices. However, the fundamentals could suggest that a correction in Gold is long overdue. Even in bigger consumer markets like India, the consumption has reduced due to very high price of Gold. Recent boost to Gold prices came as China has purchased bigger quantity of Gold but at all time highs, the save asset looks overpriced.

Gold has experienced a remarkable surge, consistently reaching new record highs throughout the current year, particularly gaining momentum over the past two months. However, this ascent has defied conventional wisdom, as the typical inverse correlation between XAU/USD and U.S. real rates, often gauged using the U.S. 10-year TIPS as a benchmark, has significantly weakened, causing apprehension among investors.

Despite a relentless increase in real yields, depicted on an inverted scale in the accompanying chart, bullion prices have continued to climb. This divergence from the norm is perplexing, as historically, elevated bond yields tend to diminish the allure of non-interest-bearing assets like gold, as investors seek higher returns in fixed-income securities.

What factors could elucidate the current market dynamics?

The Trend-Following Trap: The rapid ascent of gold may signal a market driven more by speculative momentum than underlying fundamentals. Speculative buying could be inflating prices, potentially creating a speculative bubble. Should this hypothesis hold true, a significant market correction, reverting to historical norms, could be imminent as investors reassess the intrinsic value of gold.

Financial Armageddon: The robust rally in bullion prices might reflect mounting apprehension among certain market participants regarding the possibility of a "hard landing" scenario. This scenario envisages a recession and broader market turmoil triggered by the aggressive tightening of monetary policy observed between 2022 and 2023. Gold, traditionally viewed as a safe-haven asset, offers refuge in times of potential crisis and serves as a hedge to safeguard wealth in such circumstances.

Inflation Resurgence Amidst Rate Cuts: Enthusiastic gold investors may be positioning for the long term, speculating that the Federal Reserve will embark on rate cuts regardless of prevailing economic conditions, particularly in an election year. This strategy assumes that easing monetary policy, coupled with persistent inflation above target levels, could potentially ignite a new wave of inflation, ultimately benefiting gold prices.