Following a brutal 30% decline in the price of gold since the start of the year, there are signs the yellow metal is coming back to life with the bullion price up 8% since the beginning of August. The more volatile silver price is up around 16% since the middle of July.
The sharp pullback at the start of the year should perhaps not have come as much of a surprise given gold had gained 60% in 2025 and another 30% in January 2026.
A contributing factor to recent strength of gold and silver has been renewed weakness in the US dollar against a basket of major currencies in recent weeks. A weaker dollar makes precious metals cheaper for non-dollar buyers.
It is the mirror image of the dollar strength which contributed to gold weakness in early 2026.
Dollar strength was exacerbated by expectations for central banks to hike interest rates following the US-Iran war in late February as higher energy prices fed through to higher inflation.
Since gold does not provide a yield, rising interest rates make gold less attractive compared to stocks and bonds, everything else being equal.
Renewed Central Bank buying
According to The World Gold Council (WGC), central banks and sovereign wealth funds purchased 289 tonnes of gold in the second quarter of 2026, up 62% year-over-year.
Poland was the largest buyer, followed by China, which bought its largest quarterly addition since 2023, taking its reported holdings to 2,346 tonnes.
Looking ahead, the WGC’s annual survey found 89% of central bank reserve managers expect central bank holdings to keep rising over the next 12-months, sending a message that demand remains in an upward trend.
A separate survey across 76 institutions pointed to structural changes in how reserves were managed, with more than half of central banks running domestic purchase programmes which involved governments buying gold from smaller-scale gold miners within their own country.
The WGC describes this as a shift away from holding gold as a legacy asset towards treating gold as an active, strategic allocation amid geopolitical uncertainty, rising currency volatility and reserve diversification.
Gold as a hedge
Kevin Smith, chief investment officer at Crescat Capital believes there is a scenario where gold could rise to $20,000 per ounce over the next few years.
It is a long shot, but not unprecedented.
One of Smiths arguments is that the gold price relative to the S&P 500 index is as low as it has been since 2009 and 1970, which reflects the fact that US valuations are at all-time highs, implying there is a small margin of error priced into investor's expectations. Prior peaks in the gold to S&P 500 ratio have coincided with market dislocations.
In the current set up, Smith is looking at a scenario where the AI boom doesn’t provide the expected investment returns, leading to disappointment which could cause the stock market to drop in similar fashion to the declines seen in 2001 and 2008, when the S&P 500 halved in value.
“A 50% lower S&P 500, combined with a 5.25 gold-to-S&P 500 multiple, which is well below its 1980 peak of 7.58, though slightly above its 1933 peak of 4.76, also gets us to our $20,000 price target for gold,” argues Smith.
All bets are off if interest rates stay higher for longer
With Federal Reserve chair Kevin Walsh seemingly intent on establishing his inflation-fighting credentials, central banks could hike interest rates to bring inflation back to target, after missing it for more than four years.
This would create a headwind for precious metals, which tend to do better in low interest rate environments.
Despite these concerns, markets are also cognisant of the other side of the Fed’s dual mandate, which is to keep the economy chugging along and the labour market healthy.
The bull market in US stocks means households have a greater proportion of their wealth tied to stocks than ever before, while the national US debt relative to the size of the economy is forecast by the Congressional Budget Office to climb to its highest level since the second world war over the next decade.
These factors suggest the central bank will not act hastily to risk failing to meet the other side of its mandate.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
