In previous years, rumors that the Fed would soon end its rate-hiking cycle served as a springboard for gold. It performed strongly as the cycle drew to a close. This time, however, things are different. Let’s discuss this topic and outline a trading plan for XAU/USD.
The article covers the following subjects:
Major Takeaways
- Gold is falling amid favorable market conditions.
- The Fed may end its rate-hiking cycle sooner than expected.
- Capital outflows from ETFs began in October.
- Consider selling XAU/USD if it fails to return above $4,010.
Weekly Fundamental Forecast for Gold
Everything happens for a reason. Even seemingly contradictory market moves have an explanation. Gold’s behavior in October was a prime example. The precious metal dropped even as the US dollar weakened and Treasury yields pulled back from multi-month highs. Historically, those conditions have provided a tailwind for the XAU/USD pair. This time, gold moved in the opposite direction.
There is another puzzle. Markets now expect fewer rate hikes after Kevin Warsh warned that high interest rates could hurt the AI sector, on which the US economy relies. Major banks increasingly expect just one more Fed rate hike in 2027 after the December increase, or no further hikes at all. In the past, this would have fueled a rally in gold.
Gold Prices and ETF Holdings
Source: WGC, Yahoo Finance.
Inflows into gold ETFs helped the precious metal hold up as Treasury yields surged to their highest levels since 2002. According to the WGC, gold ETF holdings increased by 67 metric tons to 4,256 metric tons in September, even as XAU/USD fell 8.5% that month. Higher interest rates typically curb investment demand for gold and trigger outflows from gold ETFs. This time, however, gold investors held on to their positions until the bitter end.
Outflows began in October and totaled $1.2 billion in the previous trading week, ending a 13-week streak of inflows into gold ETFs. Investors may have finally lost their nerve. Then again, higher bond yields may simply have started to take their toll after a delay.
Gold is also under pressure as oil holds near six-month highs amid fears that the US will resume airstrikes on Iran after the midterm elections. However, concerns about AI seem to be a much stronger bearish factor for XAU/USD.
Gold and the Philadelphia Semiconductor Sector Index
Source: Yahoo Finance.
Gold has increasingly become a source of liquidity, with investors selling it to meet margin calls on stock positions. This helps explain why the decline in the Philadelphia Semiconductor Index following a series of disappointing third-quarter earnings reports is also dragging XAU/USD lower.
Gold is becoming more sensitive to swings in stock indices. Meanwhile, high Treasury yields are starting to weigh on investment demand after a delay, weakening a key source of support for the metal.
Weekly Trading Plan for Gold
If gold fails to rebound above the key support level of $4,010, consider short trades with targets at $3,930 and $3,860. Consider long trades if the price rebounds from either of these levels.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of XAUUSD in real time mode
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