Gold Sets a Lower Tone Ahead of FED Meeting

First Weekly Decline Since August

Gold is trading lower at the start of this week. Last week marked the first weekly decline since the second week of August. Should this week also end in a loss, it would be the first such instance since June. Furthermore, we have not seen gold fall for more than two consecutive weeks this year, and the current correction remains within the scope of the April and May corrections, provided the $4,000 per ounce level remains unbroken. In the current uptrend that began at the end of 2023, there were only two instances where declines lasted three weeks. Longer corrections were observed in 2022 and early 2023, a period characterised by interest rate hikes and high inflation.

Source: xStation5

ETFs Begin Moderate Sell-Off

One of the driving forces in the gold market this year has been the influx of capital into Exchange Traded Funds (ETFs), which purchased physical gold as a hedge. ETFs started the year holding approximately 85 million ounces, a figure that has now risen to 98 million ounces. Nevertheless, historical peaks for the amount of gold held by ETFs stand at 110 million ounces, set in 2020. This indicates that there remains potential for further demand from this source, although, naturally, purchasing gold now is twice as expensive as it was then.

The reduction in ETF gold holdings is slight. However, focusing on the world’s largest fund of this type, SPDR Gold Shares (GLD.US), reveals significant reductions executed on October 22nd and 24th. These were the largest liquidations since May and April, and they followed three days of substantial inflows. While this does not yet signal a complete reversal in the gold market, further monitoring of cash flows within this fund is warranted. It is worth noting that ETFs are invested in not only by retail clients but primarily by institutions such as pension funds. Although changes in their assets are typically infrequent, a significant withdrawal of capital could trigger a snowball effect, as was observed in 2020 and 2022.

The top chart shows gold prices alongside the quantity of gold held by ETFs. The bottom chart shows daily cash flows in the largest US ETF, SPDR Gold Shares (GLD.US). Source: xStation5

Technical Outlook

Gold’s decline at the start of the week may be related to anticipation ahead of the Fed decision, which is expected to bring an interest rate cut. However, the market remains uncertain whether the Fed will signal a willingness for further moves. Concurrently, initial reports suggest some positive developments at the working level ahead of the meeting between Trump and Xi this Thursday. Consequently, Wednesday and Thursday will be a crucial period for gold. If gold were to trade below $4,000 following the Trump-Xi meeting on Thursday, we might experience a more substantial correction, potentially targeting the area around the 50.0% Fibonacci retracement. Such a correction from the all-time high would reach approximately -12%. This level would simultaneously preserve the 50-period moving average, which was key during the initial phase of the rally earlier this year. However, if gold holds the $4,000 support and ETFs cease selling, we will consider a scenario of a limited correction with the prospect of gold rising to the $4,400-$4,500 range.

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