Gold Drops Below $3900/oz as Safe-Haven Demand Wanes

Spot gold prices continued their descent on Tuesday, breaking below the $3900/oz level. The price fell more than $120 from its daily high, a decline exceeding 2%, as easing trade tensions continued to suppress safe-haven demand.

This drop follows Monday's breach of the $4000 mark. Simultaneously, Citigroup lowered its short-term price targets for gold and silver, reducing its 0-3 month gold price forecast from $4000/oz to $3800/oz and silver from $55/oz to $42/oz, citing a changing global market environment.

Citigroup's Rationale for Lowering Gold Price Targets

Citigroup attributed its revised outlook to President Trump's initiation of trade talks with countries including Malaysia, Thailand, Vietnam, and Cambodia, alongside plans for discussions with Brazil and India. This, coupled with progress in US-China trade negotiations, has reduced market uncertainty.

The bank noted that shifts in price momentum, the potential resolution of the US government shutdown, and declining inflation expectations could all exert downward pressure on gold prices in the near term.

Notably, gold prices have surged 51% year-to-date, driven by geopolitical uncertainty, interest rate cut expectations, and central bank gold purchases. On October 20th, gold reached a historical high of $4381.21/oz, but has since retreated by 10%.

Citigroup stated that "the series of concerns driving gold higher may ultimately need to become the base case scenario to sustain this bull market through 2026." The bank added that the rationale for allocating gold as a hedge against potential geopolitical and economic risks remains strong in the medium to long term.

Finding the Bottom: A Challenging Task

Market sentiment regarding a bottom for gold prices is sharply divided. Chris Weston, Head of Research at Pepperstone Group Ltd., noted in a report: "Despite gold continuing to make lower lows, and high volumes on down days in futures, calling a bottom remains a tough gig. For now, letting others take on the bottom-finding risk and looking for tactical buys after a pullback may be the safer play."

This view sparked considerable discussion at the London Bullion Market Association (LBMA) precious metals conference in Kyoto, the largest annual gathering of the global precious metals industry. John Reade, Market Strategist at the World Gold Council, stated at the conference that central bank demand for gold is not as strong as it once was and that professional traders might welcome a deeper pullback in gold prices.

An Opportunity for Central Banks?

It's worth noting that this correction in gold prices could provide an opportunity for central banks to increase their gold holdings. An official at the LBMA Kyoto conference revealed that the Bank of Korea is considering increasing its gold holdings in the medium to long term, with its last purchase occurring over a decade ago.

Market Focus on the Fed Decision

Market focus this week is squarely on the upcoming Federal Reserve interest rate decision. The two-day policy meeting will conclude on Thursday, with the market widely expecting a 25 basis point rate cut, a move that is already fully priced into interest rate futures markets. CME's "FedWatch Tool" indicates a 96.7% probability of a 25 basis point cut in October, with only a 3.3% chance of no change.

Typically, a Fed rate cut would increase the relative attractiveness of non-interest-bearing gold, as it lowers the opportunity cost of holding the asset. However, the market is more focused on the language that accompanies the Fed's decision, particularly whether Chairman Powell will signal a further rate cut in December, as well as his assessment of the labor market and inflation trends.

Impact of the US Government Shutdown

The US government shutdown has added uncertainty to the Fed's decision-making process. The shutdown, which began on October 1st, has lasted for several days, delaying the release of key economic data, forcing the Fed to rely on alternative data from the private sector and market indicators. While there are reports that the shutdown may be nearing an end, Treasury Secretary Bentsen warned that the shutdown has begun to erode the US economy, and if it continues until November 15th, the US military will face a "no-pay" situation.

Divisions within the Fed on the Rate Cut Path

Divisions exist within the Fed regarding the rate cut path, with some officials urging caution due to persistently high service sector inflation, while others emphasize the downside risks posed by trade uncertainty, advocating for prompt rate cuts to stabilize economic expectations.

Candidates for Fed Chair

The selection process for the next Federal Reserve Chair is also drawing market attention. Treasury Secretary Bentsen has confirmed that the final shortlist for the Fed Chair position has been narrowed to five individuals, including current Fed Governors Christopher Waller and Michelle Bowman, former Fed Governor Kevin Warsh, White House National Economic Council Director Kevin Hassett, and BlackRock executive Rick Rieder. Current Chairman Jerome Powell will leave office next May, and the policy leanings of the new Chair will have a profound impact on future monetary policy direction.

Conclusion

Overall, the gold market is under the influence of the intersection of multiple key variables: progress in trade negotiations, the Federal Reserve's interest rate decision and policy guidance, and the subsequent impacts of the US government shutdown, all of which will collectively determine the short-term gold price trajectory.