Gold faces its worst year in a decade. Can it regain its safe-haven status?

Gold investors could be facing their worst year since 2015, when the yellow metal lost more than 10%, Bloomberg reports. Gold, typically a safe haven in times of global instability, has seen demand weaken as bond yields rise and investors favor riskier assets tied to AI. Can it regain its appeal as a hedge against risk after the U.S. midterm elections?

Gold has fallen more than 8% year to date and is now trading below $4,000 per ounce. At the start of the year, however, bullion hit an all-time high above $5,500 per ounce.

The AI investment boom, a stronger dollar, rising government bond yields, and expectations of interest rate hikes by central banks have weighed on gold, Bloomberg notes. Analysts interviewed by Bloomberg believe that if the midterms produce political gridlock, market attention could shift back to U.S. budget deficits and inflation, traditionally a favorable backdrop for gold.

Republicans currently control both chambers of Congress. Polls show Democrats are favored to win a majority in the House of Representatives, while control of the Senate is less certain, Bloomberg notes.

Even if Democrats win both chambers, President Trump will retain his veto power, which translates into spending being kept in check. That would put downward pressure on Treasury yields and remove one of the biggest obstacles to a gold rally, Bloomberg writes, citing analysts. If Trump’s first term, when the midterms produced a divided Congress, is any guide, legislative activity could slow to a trickle, leaving the roughly $2 trillion budget deficit largely unaddressed, Bloomberg writes.

“History doesn’t repeat, but it often rhymes,” said Matt Miskin, a strategist at Manulife John Hancock Investments. “If 2027 looks anything like 2019, this weakness in gold could actually reverse.” He expects political gridlock to reduce the risk of fiscal policy pushing real yields higher, which would be “a really good development for gold.”

Anthony Saglimbene, chief market strategist at Ameriprise, notes that the next Congress will inherit a difficult fiscal backdrop regardless of its makeup. Gridlock would hamper not only spending but also unpopular measures such as deficit cuts or revenue increases. He expects investors concerned about U.S. government finances to seek safety outside of government bonds and turn to gold. A sharp rise in yields driven by deficit and debt concerns could provide an additional tailwind for the yellow metal, he believes.

Gold’s direction is closely tied to the sustainability of the AI investment boom, Bloomberg notes. Enormous demand for capital to build AI infrastructure is pushing companies into debt markets just as the U.S. government finances a large deficit. That puts further upward pressure on bond yields and weighs on gold.

Roger Aliaga-Díaz, Vanguard Group’s global head of portfolio construction, described the AI capex boom as one of the strongest investment cycles in decades, one unlikely to end abruptly. Vanguard expects economic growth to exceed consensus forecasts next year. In his view, large deficits are not necessarily positive for gold: if policymakers retain market confidence and remain willing to raise rates to contain inflation, fiscal expansion will drive bond yields higher rather than undermine confidence in the dollar.

“If the Fed does their job,” fiscal concerns should not yet be a major driver of gold prices, Aliaga-Díaz believes. However, if investors question the Fed’s independence or its willingness to contain inflation, gold will become much more attractive.

Gold’s decline below $4,000 is already attracting buyers. Doug Daly, a portfolio manager at CoreCommodity Management, said he had become more bullish on bullion after it fell below that level, though most of his election-related positioning remains focused on energy and the war in the Middle East. The Manulife strategies Miskin manages have also added gold around $4,000, bringing their positions to neutral or slightly overweight.

The midterms could trigger short-term market volatility: challenges to the results could spur demand for gold before or immediately after the vote, while divided government would eventually lead to confrontations over spending, government shutdowns, or the debt ceiling, according to Kristina Hooper at Man Group.

She believes the biggest question for investors is whether the U.S. economy will enter a period of stagflation, a combination of persistent inflation and weak growth that has historically favored gold. Hooper points to weak job growth alongside persistent price pressures. If economic growth slows, real yields decline, or concerns mount about Washington’s inability to get its finances under control, gold could quickly regain its appeal, Bloomberg writes. But if AI investment continues to support the economy, the Fed stays hawkish, and Treasuries keep offering high yields, gold will remain overshadowed.

“Right now things that are really disliked for much of the year are high-quality bonds, defensive equities, and even gold,” Miskin said. “We’re picking through that stuff.”