Is gold losing its luster, or is it just biding its time in the shadows?

Gold prices have been on a steady decline, hitting nearly a two-month low this Thursday. This trend has been largely attributed to a surge in risk-on sentiment and a strengthening U.S. dollar, which gained momentum after Donald Trump's election victory last week.

The spot prices of gold, often referred to as the "yellow metal," have plummeted almost 7% since the election results were announced, settling at $2,559.2 per ounce. On the New York Mercantile Exchange, gold futures were recorded at $2,567.3 per ounce, reflecting a similar downtrend.

This recent fall in gold value follows a series of impressive milestones over the past year. Since Donald Trump’s victory, gold prices have slipped during six of the last seven trading sessions, marking a significant pause in a bullish phase for bullion.

Maximilian Layton, Citi's global head of commodities research, commented on the situation. He commented, "There's a pause in the bull market in gold and silver, and that may continue for the next couple of weeks or so." Layton explained that gold is likely to remain under pressure as U.S. stocks surge, particularly with expectations of reduced taxes and fewer regulations.

Trump's return to the White House has triggered a surge in U.S. stocks, with many reaching record highs. However, this upward rally has shown signs of pausing in recent trading sessions. The post-election enthusiasm has also extended to cryptocurrencies, notably Bitcoin, which briefly surged beyond $93,000 for the first time on Wednesday. Investors seem optimistic that Trump will fulfill many promises that would benefit the cryptocurrency industry.

"Trump looking like he's going to have a red sweep and higher deregulation, lower tax environment has led money into equities, money into bitcoin, and money out of gold," Layton told CNBC.

Moreover, the dollar index has climbed to a one-year high. The strengthening of the U.S. dollar has made gold more expensive for investors using other currencies, further contributing to the drop in gold prices.

Vivek Dhar of the Commonwealth Bank of Australia explained the dynamics behind the rising dollar. In a note written on Wednesday, Dhar noted, "The rise in the U.S. dollar reflects how markets have priced in Trump’s inflationary policy agenda, which primarily includes tax cuts and tariffs."

The optimism surrounding equities is evident, with Nicky Shiels, the head of metals strategy at trading services firm MKS Pamp, describing the current market environment as being in "euphoria territory." She added, "Until this Trump trade honeymoon phase runs its course, gold and silver are amidst repricing to a less bullish trajectory."

Despite the recent dip in prices, many market experts remain optimistic about the fundamental drivers of the gold market. Layton expressed that the core elements influencing gold prices are still intact. He emphasized that, following Trump’s election, speculation about potential tariff policies and their impact on the global economy has grown. This speculation could prompt investors to seek refuge in gold and silver as a hedge against potential economic downturns.

"As that happens, people will be buying gold and silver to hedge those downside risks," said Layton.

Additionally, financial services firm Canaccord Genuity anticipates that central banks' demand for gold will remain robust, if not increase. This demand is driven by concerns regarding the U.S. fiscal situation and rising geopolitical tensions. Central banks purchased record amounts of gold during the first half of 2024, indicating strong confidence in gold as a reserve asset.

Analysts at Canaccord Genuity elaborated on this trend. "If President-elect Trump’s second term is anything like his first, with a confrontational approach to friends and foes alike, we believe strong international demand for gold as a reserve asset is likely to continue relative to demand for treasuries," they stated in a report.

A combination of factors, including increasing debt, geopolitical instability, and ongoing central bank demand, is expected to provide substantial support for gold prices shortly, according to Canaccord Genuity’s outlook.