Silver Dominion | Data cutoff: 25 October
What makes us cautious about gold is that prices are falling even as some market conditions improve.
Bond yields fell, which usually helps gold. Central banks continued buying, and gold investment funds increased their holdings to a record in September. Even that combination failed to stop another decline.
We still see reasons to be constructive on gold over the longer term. But its failure to respond to better conditions makes us reluctant to call a bottom. For now, we place more weight on that weak response than on reassuring headlines about central-bank purchases.
After Weeks of Hesitation, Another Decline
Friday’s spot closing price was approximately $3,996, leaving gold down around 4% for the week. The December COMEX gold contract, whose price differs slightly from the immediate spot price, settled at $4,007.90.
The decisive move came on Thursday. Gold broke below the area where it had traded for much of October and moved lower. The market’s attempt to settle down suffered a significant setback.
We see $4,000 as a test of buyers’ commitment. A brief move above it would offer little reassurance. We want to see whether buyers defend the price when selling pressure returns.
Market Snapshot
| Indicator | Latest Reading / Date | What It Tells Us |
|---|---|---|
| Spot gold | About $3,996 / 23 October close | Buyers failed to defend $4,000 |
| 10-year real yield | 2.64% / 22 October | Some pressure on gold has eased |
| Funds’ net bullish position | 104,206 contracts / 20 October | Lowest reading in the 13 weeks reviewed |
| Global gold ETF holdings | 4,256 tonnes / end-September | Some investors bought during the decline |
| Chinese central-bank purchases | 23 tonnes / September | Reserve accumulation continued |
Fund positioning and physical purchases have different reporting dates.
Why Have Lower Yields Not Helped More?
Gold pays no interest. When bonds offer more attractive returns, some investors may prefer them. Falling yields reduce that competition.
That is why the decline in the US 10-year real Treasury yield from 2.80% on 19 October to 2.64% on 22 October deserves attention. This yield accounts for expected inflation and is an important measure of the conditions facing gold.
Yet the metal still fell sharply.
Monetary-policy concerns have certainly not disappeared. The Fed raised rates to 3.75%–4.00% in September, and annual consumer inflation subsequently reached 3.7%. Threats to Middle Eastern energy supplies could also push oil prices higher and further complicate the fight against inflation.
Our concern is that explaining every decline through interest rates can hide a change within the gold market itself. When a familiar obstacle eases and prices still fall, we pay closer attention to who is selling.
Funds Are Retreating From Their Earlier Optimism
Our reading is that investment funds are unwinding some of their earlier confidence in gold. We consider this one of the clearest explanations for the pressure on prices, although the weekly data cannot account for every trade.
The 13 weekly COT reports, covering 28 July through 20 October, show the following pattern:
- In late July, major investment funds’ bullish positions exceeded their bearish positions by approximately 120,000 contracts.
- By late August, that difference had increased to around 145,000 contracts.
- Eight consecutive declines then took it down to approximately 104,000 contracts.
These figures measure the difference between positions benefiting from rising and falling prices. The direction matters: funds initially became more confident, but have been pulling back since late August.
They have mainly been closing earlier bullish positions. New bearish bets did not increase by a comparable amount across the full period. Over the past month, however, both developments contributed: fewer bullish positions and more bearish ones. The net bullish position fell by approximately 18% during that time.
A fund does not need to expect a prolonged decline in gold to sell it. It may simply want to reduce risk or have lost confidence in a quick recovery. When several funds behave this way, selling can weigh on prices for weeks.
The total number of outstanding futures contracts is also below its August peak, although it remains above July’s level. It increased again in the latest week, but part of that change involved combined trades that cannot be read as a simple bet on one price direction.
We find this reduction in positions useful for understanding the correction. It has removed some earlier optimism, potentially making room for future buyers. We would become more encouraged when funds stop retreating. The latest report also predates Thursday and Friday’s sharp losses.
What Are Other Major Traders Telling Us?
Among producers and merchants, the excess of bearish over bullish positions has narrowed since August. It is now smaller than in July. Swap dealers—financial intermediaries—have also reduced that difference since August, but it remains larger than in July.
We put less weight on these positions as a price forecast. The groups tracked by the CFTC often use futures to hedge business activities. A producer may be protecting the price at which it will sell gold in the future. Its position can therefore express something quite different from an investment fund’s bet.
We read the options market with similar caution. The World Gold Council’s 19 October report, using data through 16 October, described increased interest in short-term trades protecting against or benefiting from a decline.
Some investors may simply be insuring gold they already own. To us, this reinforces the picture of a nervous market, but offers little confidence about the timing of a turn.
Physical Buying Continues, but Each Market Looks Different
The physical-market detail we find most encouraging is that substantial buying continued while gold was falling.
Global physically backed gold ETFs added 67 tonnes in September. Their holdings reached a record even as gold fell 8.5% during the same month. The weekly report also described renewed North American inflows in the week ended 16 October.
That gives us more confidence in underlying investment interest. The next question is whether those buyers remain active through October’s sell-off.
China’s central bank added 23 tonnes in September, its largest monthly purchase since October 2023. Chinese wholesale demand, however, remained weaker than a year earlier. Strong reserve purchases should therefore not be mistaken for equally strong household demand.
Seasonal buying has meanwhile become more evident in India. The domestic discount to import parity narrowed from September’s average of $66 per ounce to $8 by 16 October. Supply remained adequate at that point.
These differences between regional markets matter to our outlook. Official purchases are strengthening in China, while seasonal demand is improving in India.
Lower prices give committed buyers more gold for the same money. We believe that can help demand during festivals and the wedding season. We are less convinced that it can quickly outweigh persistent selling by funds.
Inventories do not tell a straightforward shortage story either. London vaults held 9,821 tonnes of gold at September’s end, more than a month earlier. These holdings belong to different owners and are not all available for sale. They cannot be treated as freely available supply or used to infer an approaching shortage.
Where Could the Balance Begin to Change?
We are watching three price areas:
- $3,960–4,000: where buyers now need to stop the decline.
- $4,065–4,110: an area that previously supported gold and could now obstruct a recovery.
- $4,200–4,225: the upper part of October’s range, where a breakout would mark a more meaningful improvement.
These areas reflect recent trading. The lower band also incorporates earlier summer lows discussed in Pepperstone’s review.
What would persuade us most is a recovery followed by a pullback that holds above the previous low. That would show buyers beginning to defend higher prices. A strong day alone would carry less weight.
Three Scenarios for the Coming Months
Our base case is a gradual stabilisation and an attempt to establish a floor. Funds have already substantially reduced their earlier bullish bets, while the latest available figures still show ETF and central-bank buying. Together, those developments give us a reason to expect buying and selling to become more balanced.
The weakness in that argument is clear: funds are still retreating, and lower yields have not stopped the decline. Our base case depends on selling easing; it assumes no immediate rush back into gold.
| Scenario | What Needs to Happen | Price Range | Time Horizon |
|---|---|---|---|
| Base | Buyers defend the summer support area and selling eases | Mainly $3,950–4,200 | 1–3 months |
| Bull | Gold holds above $4,225 and investment buying strengthens | Potential recovery towards $4,300–4,450 | 2–4 months |
| Bear | Prices settle below $3,960 and funds continue selling | Risk of a decline towards $3,850–3,950 | Weeks–3 months |
The base range lies between current support and the area where October’s rallies stalled. The bull case assumes a move above late-September levels and a partial recovery from the preceding sharp decline. The bear case includes a possible retest of approximately $3,886, the low in the quoted 52-week spot range.
Our view would change with the evidence:
- If repeated selling stops producing new lows, we would gain confidence in stabilisation.
- If gold breaks above $4,225 and subsequently holds that area, we would lean more towards recovery.
- If it repeatedly closes the week below $3,960 and attempts to recover fail, we would give greater weight to the bear case.
A sustained loss of lower support would undermine our expectation of gradual stabilisation.
Better News Needs to Start Showing Up in the Price
We remain constructive on gold’s longer-term role, supported by continuing reserve purchases and investment demand. Our near-term stance is more cautious because the market has yet to demonstrate that those buyers can absorb the selling.
Around the Fed’s 27–28 October meeting, we will watch:
- Whether gold holds its current support area after the decision.
- Whether lower bond yields or a weaker dollar finally produce lasting gains.
- Whether funds stop reducing bullish positions and ETF demand persists.
- Whether physical purchases strengthen beyond the usual seasonal improvement.
For us, the strongest reason to turn more positive would be gold holding up better when sellers return. Combined with steadier fund positions and continued ETF buying, that would suggest demand is beginning to influence the price more decisively. Until then, we see a market searching for a floor, with further downside still possible.
Leave a Reply