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Gold Plunges Following Record Highs: is the Correction Over?
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Gold experienced a sharp downturn, extending losses from tuesday and bringing the $4000 level into focus as a key support point. The precious metal tumbled 6% in its steepest one-day selloff since the pandemic, reversing a historic rally that saw prices reach an all-time high of $4381 on Monday. Today’s trading indicates a further 2% decline, prompting analysts to assess whether this marks a temporary correction or the beginning of a more substantial trend reversal.
A Long-Overdue Technical Correction
The recent pullback appears to be a technical correction after a notable surge, with XAU/USD climbing 25% over the past two months. “This week’s pullback has the traits of a technical correction rather than anything more sinister,” one analyst noted, suggesting the longer-term basic outlook remains bullish. The rapid ascent had left the market overextended, making it vulnerable to profit-taking and a recalibration of risk.
– central banks globally purchased nearly 1100 metric tons of gold in the first three quarters of the year, one of the highest volumes on record. This demonstrates gold’s continued appeal as a safe-haven asset.
Factors Fueling the Selloff
Several factors converged to trigger the correction. Easing concerns surrounding US-China trade tensions, coupled with a strengthening US dollar and widespread profit-taking, created a bearish surroundings for gold. A slightly softer tone from President Trump regarding China, with expectations of a meeting next week to address tariff disputes, contributed to the diminished trade war anxieties.
Despite the recent decline, gold remains up over 50% year-to-date, bolstered by ongoing geopolitical uncertainties – including the postponement of the Trump-Putin summit – continued central bank demand, and expectations of potential interest rate cuts by the Federal Reserve.
Central Bank Demand Remains Strong
Central bank demand for gold continues to be a significant supporting factor. According to the World Gold Council, global central banks purchased nearly 1100 metric tons of gold in the first three quarters of the year, representing one of the highest volumes on record.This robust demand, alongside strong inflows into exchange-traded funds driven by institutional investors, underscores the enduring appeal of gold as a safe-haven asset.
– Keep an eye on US CPI data, scheduled for release Friday. A higher-than-expected reading could prompt the Fed to delay rate cuts, possibly pressuring gold prices.
Near-Term Risks and Economic Data
The outlook for a swift resolution to the potential US government shutdown is fading, which may limit the availability of key economic data. However, US CPI data, scheduled for release on Friday, is expected to provide some insight for the Federal Reserve.The market currently anticipates a 97% probability of a 25 basis point rate cut and two rate cuts before the year’s end.
The primary near-term risk for gold lies in a significantly higher-than-expected CPI reading, which could prompt the Fed to adopt a more cautious stance and potentially reduce expectations for rate cuts, thereby putting downward pressure on gold prices.
Long-Term Bullish sentiment Persists
Despite the short-term headwinds, the long-term outlook for gold remains positive, driven by continued central bank buying and persistent geopolitical risks. Investment banks such as Goldman Sachs and Bank of America have projected gold prices reaching $4900 and $6000, respectively, in the coming year.
– Is this correction a buying chance? Analysts suggest the long-term outlook remains bullish, but monitoring the $4000 support level is crucial.
XAU/USD Technical Analysis
From a technical viewpoint, gold continues to exhibit a bullish bias, trading above its upward-sloping 20, 50, and 200 Simple Moving Averages (SMAs).The recent pullback to test the 20 SMA and the $4000 psychological level has also alleviated some of the overbought conditions indicated by the relative Strength Index (RSI).
Should the $4000 support level hold, the next resistance barrier is anticipated at 4125, followed by 4200 and a potential retest of the record high at 4380.However, a
