After a remarkable 60 percent increase since the start of the year and nine-week winning run to reach a record high of $ 4380 a troy ounce, the gold bull run took a breather 10 days ago with a sharp price correction. Rates dropped by as much as $ 280 single day. October 24, the yellow metal was trading at $ 4053/oz showing a 4.7 percent decline week-on-week.

This was not surprising as the market had got into a large overbought position in anticipation of a further price rise; and a correction seemed imminent. Many retail buyers who got carried away by the bull run and bought at higher prices in anticipation of further price rise lost heavily in the correction.

Following the price decline, ETF investors were seen booking profit as evidenced by outflows from ETFs. Earlier, reports suggested a strong inflow into gold ETFs with a high level of interest among investors in North America. A total of 220 tons flowed into ETFs in the third quarter, 50 tons more than in the previous quarter, and significantly more than in the third quarter of 2024. This suggested higher demand for gold.

However, high prices have had a negative impact on demand for jewelry, which accounted for a good 40 percent of total gold demand last year. Demand declined significantly in the first half of the calendar year (about 17 percent below last year).

Again, in the first half of the year, the amount of gold purchased by central banks lost some momentum.

Other conditions supporting the yellow metal and its safe haven status are also seen weakening slightly. While geo-economic and geopolitical tensions continue, it is clear they are not escalating, but actually de-escalating. Trump - Xi meeting over tariffs is a case in point. 

Some reports suggest physical demand for gold could recover as jewelry buyers have got accustomed to high prices. This statement seems to be presumptuous and may be taken with a pinch of salt. 

Despite the price decline, there’s still an enormous amount of speculative capital in the gold market creating what is called a ‘speculative lather or foam’ that has the tendency to dissipate as fast as it gathers.

Time seems to be ripe for a consolidation on the gold market. It may trade sideways until fresh triggers appear on the horizon. In the US consumer confidence and resilience is still fairly high. While upcoming inflation data would be crucial, interest rate expectations have played only a minor part in the development of gold prices.

In India, Kharif season harvests and festivals have boosted the upbeat mood. While jewelry sales were reported to be brisk, expectations of a further price correction have somewhat discouraged buyers. The next two months will see a slowdown in physical demand.

From an investment perspective, it is time to wait and watch for price signals and not take far forward positions as uncertainties continue to rule the sentiment. Caution will continue to be the watchword especially for small investors.

Note: The purpose of this article is educational and not intended to be a trading recommendation. There may be risk of loss in trading.