By Martin Baccardax

Gold slumped deeper into bear market territory on Wednesday, dipping below $4,000 an ounce for only the second time since November, as the markets hottest early year trade continues to face the new reality of faster inflation, rising Treasury yields and a hawkish Federal Reserve.

The bullion also is seeing a good portion of its early-year forth, which pushed prices to a record high of $5,589.38 in January, fade in favor of the tech trade, which drew billions out of gold portfolios and into chip and AI investment funds over the six months ended in June.

That's likely no surprise given that the PHLX semiconductor index has powered more than 100% higher since the start of the year. It also recorded its best quarterly performance ever, a gain of around 88%, over the three months ended in June.

Global gold ETF holdings have declined around 1.5% from the start of the year, with flows in May "slowing to a trickle," according to the World Gold Council.

"Investors who missed the upside, or needed to keep pace with benchmarks, appear to have rotated back into risk-on sectors such as technology," the council noted. "So far, markets seem to be paying little heed to the risk of a prolonged war in the Middle East."

Gold prices have fallen nearly 30% from their January peak, and slumped around 15% over the second quarter. Its overall decline of around 11.7% in June, in fact, was the worst monthly performance since 2008, and followed Kevin Warsh's hawkish tone on interest rates and inflation risks during his maiden appearance as Federal Reserve chairman.

The bullion was falling 0.5% at $3,995.57 an ounce early Wednesday

"The selloff may appear surprising given ongoing geopolitical uncertainty and continued central bank buying," said Ewa Manthey, commodities strategist at ING. "However, gold's weakness highlights the extent to which markets have shifted their focus from safe-haven demand toward the implications of higher interest rates and tighter financial conditions."

Still, a big portion of the metal's price support remains intact, with central banks adding 244 tons to their holdings over the first quarter, and China extending its run of net purchases to 19 consecutive months in May.

World Gold Council surveys, in fact, suggest that around 84% of global central banks expect to boost their gold holdings over the next five years.

"Gold's correction has prompted a reset in our forecasts, but not in our broader view of the market," said ING's Manthey, who sees a third-quarter price average of $4,300 an ounce, rising to around $4,600 over the final three months of the year.

"We continue to believe the structural drivers supporting gold remain intact, though the path higher is likely to be slower and more volatile than we previously expected," she said.

That's going to be a harder case to make over the near term, however, as gold descends below $4,000 and its digital equivalent, Bitcoin, staggers below the $60,000 threshold that it breached last week.

Bitcoin prices, in fact, have tumbled more than 53% since reaching an all-time peak of $126,198.07 in early October, with a 13% decline for the second quarter and a slump in 2026 of more than 32%.

Still, UBS analysts, led by Myles Allsop, think gold's bull run, which in some ways began with the breach of $2,000 an ounce in late 2023, is likely "on pause, rather than over."

"In the near-term, gold continues to face headwinds from expectations of Fed rate hikes, higher real rates and a stronger dollar," he said. "However, market positioning is now very lean and we think further downside is likely to be limited."

"We expect the psychological $4,000 area to see support from long-term investors looking to re/build positions at better levels and physical buyers," he added.

Write to Martin Baccardax at martin.baccardax@barrons.com

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