In recent years, the remarkable performance of gold has entered a seemingly sustained uptrendThe driving force behind this surge primarily stems from excessive fiscal policies adopted by governments around the worldSuch measures have not only intensified the risks of structural inflation but also increased the likelihood of sovereign states resurrecting the printing press, which further enhances the allure of gold as a safe-haven asset.

The behavior of central banks has emerged as a central catalyst in the recent increase of gold pricesFaced with stubborn inflationary pressures and the trend of using the dollar as a political weapon, there has been a pronounced global demand for diversification of reserve assets, which has catapulted gold into the spotlight.

Although gold might encounter technical pullback pressures due to excessive buying in the short term, its robust fundamentals suggest that a long-term upward momentum is likely to continue

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Notably, even amidst a rapidly appreciating dollar and rising real yields, gold still achieved its strongest annual return since 2010, outpacing even the well-performing S&P 500 index, marking it as one of the few assets to outperform the market in this century, as pointed out by Bloomberg macro strategist Simon White.

The surge in gold demand has been primarily driven by central banks, which are seeking to mitigate risks by increasing their gold reserves in light of profound changes in the global political and economic landscapeEspecially with the United States leveraging its monetary position to confront rivals while attempting to maintain its dollar dominance, reserve diversification has become critically important for emerging marketsFurthermore, developed countries are also accelerating their accumulation of gold to hedge against potential risks arising from government generosity and spending that could devalue the dollar and other fiat currencies.

In recent years, a significant shift in fiscal policy, notably the trend of increasing spending even during periods of economic prosperity, has exacerbated this scenario

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The traditional tight correlation between government deficits and unemployment rates has been disrupted; even with unemployment remaining low, government net spending continues to grow, establishing a new normal of "fiscal support."

Markets have not been blind to these changes; they recognize the implications for the long-term real value of government bonds, particularly for critical assets such as the dollar, German bonds, and UK bondsSince the decoupling of the dollar from gold in 1971, the purchasing power of fiat currencies has significantly erodedAs long as sovereign states have incentives to print money to cover fiscal deficits, this trend is unlikely to reverse.

In contrast, gold's supply is limited by the speed of its mining operations, which reliably parallels long-term GDP growth ratesThroughout history, the purchasing power of gold has remained stableFrom ancient Rome to modern times, the purchasing power of an ounce of gold has hardly changed, underscoring its unique position as a store of value.

Nonetheless, no asset can perpetually ascend without correction

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Gold's recent robust performance has placed it in overbought territory, hence the risk of pullback cannot be overlookedThis trend is not limited to dollar valuations, as gold has set historical highs against all major emerging market and developed market currenciesThis situation resembles the market dynamics of 1979-1980 when gold prices quadrupled.

A critical analysis of historical data reveals that January has typically been a strong month for gold in long-term market performanceEven amidst this historically favorable backdrop, gold prices may still face robust support from factors such as seasonal demand and portfolio adjustments during the initial phaseHowever, as time progresses, market dynamics shift and buying momentum may gradually weaken, leading to a latent pullback pressure that could rise to the surfaceAmong these factors, retail investors may engage in panic selling due to market volatility and central banks could exhibit a reduced willingness to purchase based on their reserve strategies, potentially exacerbating the downward trend in gold prices

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Furthermore, the critical Asian demand, crucial for driving gold price increases this year, may falter due to changes in the regional economic landscape and shifting consumer preferencesAdditionally, should inflation in the U.Sfail to make significant strides at pivotal moments, the Federal Reserve may adopt a slightly hawkish posture, thereby elevating global real yields and undeniably imposing a negative impact on gold prices.

However, despite these potential challenges, gold is still only 6% shy of its historical peak, indicating that amid increasing global financial uncertainty, the demand for physical gold as a means of hedging risks remains strong.

This year, the gold market is likely to experience considerable volatility and could undergo a correction at some pointNevertheless, considering the fundamental reasons bolstering gold holdings—widening monetary policies, fiat currency depreciation, and geopolitical uncertainties—are more prominent than ever before, the market might engage in opportunistic buying during pullbacks, thereby maintaining its long-term upward trend.