Gold Price Drop Ends When Fed Acknowledges 'Fiscal Dominance'

The S&P 500 recorded 820 million won, and the KOSPI recorded 480 million won. When 100 million won was invested 20 years ago, Nasdaq in Korean won was 1.63 billion won, gold was 1.07 billion won, Gangnam apartments were 260 million won, and KOSDAQ was 130 million won. Gangnam apartments, in particular, had many actual beneficiaries thanks to leveraged investment and low transaction turnover.

The S&P 500 recorded 820 million won, the KOSPI recorded 480 million won, Gangnam apartments recorded 260 million won, and KOSDAQ recorded 130 million won.

While Gangnam apartments had many actual beneficiaries, this was due to leveraged investment and low transaction turnover. 1g of gold rose from 16,800 won 20 years ago to 107,000 won, and the S&P 500 index climbed from 1248 to 6780.

Nasdaq experiences crashes of around 50% every 8-12 years, characterized by high volatility where up to 80% of assets can be lost during investment.

To prepare for such risks, holding gold or short-term Treasury bonds together can provide opportunities to buy Nasdaq at low points during downturns.

Asset diversification is not merely about lowering returns, but a strategic approach to secure investment capacity in response to market volatility.

Korean investors tend to evaluate the returns of dollar assets like gold and US stocks by converting them into Korean won.

Over the past 20 years, as the exchange rate rose from 1,111 won per dollar to 1,338 won, Nasdaq's dollar-based return of 12.3 times increased to 16 times in won, and gold's dollar-based rise of 8.1 times also converted to 10.7 times in won.

This suggests that gold's scarcity is strengthening as new gold discoveries slow, leading to a structure where the Fed's quantitative easing and gold price increases are closely proportional.

During the same period, the S&P 500 fell 23% relative to gold, and Gangnam apartments fell 76%, with won deposits falling 83% relative to gold, highlighting the significant real value depreciation of won assets.

Since 2019, consistently emphasized allocating 10% of portfolios to gold.

Gold was recommended as a hedge against a weakening dollar, suggesting a ratio of dollar assets (50%), won assets (40%), and gold (10%).

Thanks to this strategy, gold prices have risen 3.8 times since January 2019.

Gold prices do not rise in a straight line, showing significant annual fluctuations in returns.

For example, volatility is high, with surges of 17% in 2023, 44% in 2024, 62% in 2025, followed by an 11% adjustment in 2026.

Unlike deposits, gold is an asset whose price is determined purely by market principles without government or institutional price support.

Deposits, bonds, and the dollar are promises based on the issuer's credit, and if US Treasury bonds falter, the dollar's hegemony could crack.

In contrast, gold has no issuer and is an independent asset that doesn't rely on anyone's credit.

Gold is traded based on the intrinsic value and trust of the object itself, fundamentally differing from currency.

Central banks have emerged as key players in gold demand, absorbing over a third of the approximately 3,600 tons of annual gold mined.

In 2022, when the United States froze $300 billion in Russian assets during the Russia-Ukraine war, countries that could potentially clash with the West realized the risks of holding U.S. Treasury bonds.

Subsequently, central banks' annual gold purchases doubled from 500 tons in 2010 to 1,000 tons starting in 2022, primarily for securing safe assets rather than for capital gains.

Gold's share of total foreign exchange reserves is 27%, surpassing U.S. Treasury bonds (22%) and the Euro (15%), marking the first time in 30 years since 1996 that gold's proportion in central bank vaults has exceeded that of Treasury bonds.

In the first quarter of this year, central banks' gold purchases amounted to only 57 tons, but they increased fivefold to 289 tons in the second quarter. Even during the gold price decline in the third quarter, $31 billion flowed into gold ETFs, and in September, futures operating funds sold 84 tons of gold, inducing a short-term adjustment.

Central banks, which bought 57 tons in the first quarter, increased their purchases fivefold to 289 tons during the sharp drop in gold prices in the second quarter.

At the same time, $31 billion flowed into gold ETFs, but in September, futures operating funds sold 84 tons of gold, signaling a short-term price adjustment.

The primary reason for the decline in gold prices in 2026 is analyzed to be a correction following a steep annual average increase of 66% over the past four years.

During this period, rumors of Kevin Warsh's nomination as Fed Chair, hawkish remarks at the Jackson Hole meeting, and the FOMC's 0.25%p interest rate hike all influenced the decline in gold prices.

Treasury Secretary Bessent artificially lowered the 10-year Treasury yield by reducing the issuance of 10-year Treasury bonds and converting them to short-term bonds of one year or less. This was a 'revolving credit' measure involving the issuance of $6.7 trillion in short-term bonds to artificially lower long-term interest rates.

The U.S. government is employing a tactic of buying back existing long-term Treasury bonds and reissuing them as short-term bonds to defend the 10-year Treasury yield at 5.2-5.3%.

However, short-term bond yields are linked to the base interest rate, creating a structural problem where the U.S. government's interest burden would rapidly increase with a hike in the base rate.

Due to these policies, U.S. interest expenses are expected to reach $970 billion in 2025, surpassing defense spending, and are projected to soar to $2.1-2.5 trillion by 2036.

Every time the Fed makes statements about raising interest rates, gold prices, which are sensitive to interest rates, tend to fall. In response to central banks' increasing gold holdings, the Fed, aiming to protect the dollar's status, expresses its determination to curb inflation and keeps the market in check with interest rate hike signals.

Every time such interest rate hike statements come from the Fed, gold prices, sensitive to interest rates, tend to fall.

This reflects the Fed's policy intention to protect the dollar's status in response to central banks' increasing gold holdings.

The point at which the Fed's bluff is called or the federal government officially declares it cannot afford the interest will be the end of the gold price decline.

The explosive growth of GDP due to the AI revolution appears to be a hopeful outlook that is realistically difficult to achieve in the short term.

This allows for participation in economic growth while preparing for unexpected risks and protecting assets.

Nasdaq offers high returns but is volatile, so cautious investment utilizing adjustment periods is effective.