Gold Price Hits 2-Week Low after Winning Spree

The price of gold fell for a third day on Tuesday, 8 October, with early losses on tap early Wednesday as bullish traders eased off from recent enthusiasm. After reaching a record high of 2,694.90 on 26 September, gold trading entered a period of consolidation.

Spot gold sits around $2,620 per oz in early trading on Wednesday morning, touching a 2-week low. 

Gold has been on a monster rally this year, returning 40% in the past 12 months, even after accounting for the recent pullback.

Why is the Price of Gold Falling?

Analysts and commentators have put forward multiple explanations for falling gold prices:

1. NFP and Rate Cuts

The gold price decline was kicked off by the stronger-than-expected non-farm payrolls report on Friday. Strong US economic data is usually interpreted as positive for the US dollar and can diminish the demand for gold priced in dollars. 

US job growth picked up pace in September, and the unemployment rate dropped to 4.1%, reducing the pressure on the Federal Reserve to implement an additional 50 basis point rate cut at its upcoming policy meeting on 6-7 November. (Source: Reuters)

2. Haven Demand

Gold is probably the best-known safe haven during periods of economic or political uncertainty. Heightened tensions in the Middle East have added to the appeal of gold. As time passes and traders price in geopolitical risks, the market refocuses its attention, and demand could at least temporarily fall. 

Analysts from Commerzbank (CBK.DE) noted that the fact that gold hasn’t fallen more sharply shows there is still safe-haven demand underlying the price.

3. A Bullish USD

It is likely no coincidence that the gold price pullback has occurred alongside major forex pairs like EUR/USD. The common denominator has been the strength of the US dollar. 

The recent decline in gold prices has happened as the US dollar hit a seven-week high, which has made gold more expensive for international buyers. Investors are paying close attention to the Federal Reserve’s coming decision, with an 86% probability of a 25-basis-point rate cut in November, following the latest US employment data.

Record 5 months of Inflows into Gold ETFs 

In a sign of the underlying demand from investors, according to a report by the World Gold Council (WGC), gold Exchange-Traded Funds (ETFs) grew by an additional 5% in September, pushing global gold assets under management to a month-end high of $271 billion, with North American funds making the largest contribution.

The World Gold Council noted that gold prices are well-positioned to gain from several market factors, including the growing need for diversification and risk hedging in broader portfolios, sustained purchases by central banks, stronger demand from major markets like India, renewed interest from Western investors, and escalating tensions in the Middle East. 

Alternatively, it might be that many of these bullish factors are already priced in, such that gold’s market value no longer benefits.

Commodities Pressured

Commodities across the board have been under pressure in the first half of the week, unwinding recent gains. The Bloomberg commodity index is up 7.5% this month.

A surprisingly large buildup in US inventories sent Brent and WTI crude oil futures down by more than 4% on Tuesday, which had also risen in recent days amid escalating geopolitical tensions.

Conclusion

In summary, gold prices have entered a consolidation phase after a strong rally, possibly influenced by a stronger US dollar and positive economic data. While geopolitical tensions and central bank purchases support demand, these factors could be largely priced in already. Despite the recent dip, gold remains significantly up for the year with continued investor interest in commodities as a group, including crude oil.