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- Gold just had its worst day in 12 years, snapping a record-breaking rally.
- But investors may not be giving up yet, with inflation fears and global turmoil fueling demand.
- Central banks are set to keep piling in, helping to put a floor under prices, according to Lombard Odier.
Gold's record-breaking run snapped on Tuesday, tumbling in its worst single-day drop in 12 years after a historic rally.
Still, the yellow metal's underlying supply-and-demand dynamics remain solid — even at "significantly overbought" levels in the short term, wrote analysts at Lombard Odier, a Swiss private bank, in a note on Tuesday.
"Technical signals are challenged by today's more fundamental environment of accelerating demand and constrained supply," wrote Kiran Kowshik, a global foreign exchange strategist, and Luca Bindelli, the bank's head of investment strategy.
Spot gold was trading around $4,140 per ounce at 1:09 a.m. ET on Wednesday, down from a record $4,381.21 per ounce on Monday, according to LSEG data.
Prices have climbed as much as 60%, as investors — from central banks to private funds — sought protection from persistent inflation, widening fiscal deficits, and geopolitical risk. At the same time, supply remains constrained.
That dynamic will likely support prices, with official-sector demand a key stabilizing force for gold.
"Central banks still create a higher gold 'floor,'" the strategists wrote, adding that the institutions have steadily built up their gold holdings since 2008.
"Over many centuries, gold has offered — and continues to offer — currency-like characteristics: it serves as a medium of exchange, a unit of account and a store of value," they added.
Those qualities are particularly attractive now, given the high US government debt, which is weighing on Treasurys — a key reserve asset for central banks.
"As gold's value will either be left unaffected by fiscal uncertainties, or benefit in the context of broad US dollar depreciation, we believe there is still scope for central banks to further diversify their reserve holdings in gold," Kowshik and Bindelli wrote.
The analysts also cited nervousness about US financial sanctions, broader geopolitical risks, and unpredictable tariff policies under the Trump administration as additional drivers of central-bank demand.
"Macroeconomic and geopolitical uncertainties are likely to remain conducive to further gold demand," they wrote, raising their 12-month gold price target from $3,900 to $4,600 per ounce.
The bank's assessment landed as gold prices slumped, as investors locked in profits after a blistering rally in one of the year's most crowded trades.
The massive run-up and abrupt pullback in gold prompted Bill Gross, the Wall Street billionaire known as the "Bond King," to tell Business Insider that gold was "exhibiting characteristics of meme and momentum stocks."