Last week, London spot gold traded broadly lower, rallying then pulling back within the week for a decline of about 2%, while Shanghai gold weakened in tandem.
The core drag came from U.S. economic data that proved more resilient than expected, prompting the market to push back expectations for how long the Federal Reserve will keep rates high, with the 10-year Treasury yield rising and the dollar strengthening.
Near-term price action is being driven mainly by a repricing of rate expectations; this week the market is watching domestic and overseas PMI readings and U.S. nonfarm payrolls data, and with a long holiday approaching, attention is on capital flows.
Looking ahead to the fourth quarter, the center of gravity for precious metals prices is expected to edge slowly higher, driven by multiple structural bullish factors, though upside remains capped by the policy constraints of Warsh's "hawkish" thinking.
The first layer of logic is that the gold pricing anchor has shifted back to "dollar credit."
The third quarter already showed a divergence of "yields rising but gold prices not falling," as a fragmented geopolitical landscape combined with market concerns over U.S. fiscal soundness and dollar credit continues to generate strong demand for alternative reserve assets, and as the only metal reserve asset, gold naturally draws strong favor.
The second layer of logic comes from rigid central bank buying.
Global central banks' second-quarter gold purchases hit a quarterly record, and the People's Bank of China added 480,000, 640,000 and 650,000 ounces in June, July and August respectively; this "buy more as prices fall" pattern, backed by strong central bank credibility, forms the most solid floor for gold prices.
The third layer of logic is the event-driven catalyst from the midterm elections.
With the U.S. midterm elections approaching on November 3, whether Republicans can hold their ground amid Trump's repeated policy setbacks, and whether Democrats can retake Congress, both carry enormous uncertainty; U.S. equities face a sharp reversal risk and risk assets face pressure, so gold as a safe-haven asset may advance steadily.
The risk to watch, then, is that Warsh's "hawkish" thinking has not shifted much; if inflation does not return to a downward trend, a second rate hike this year could land in December, and gold prices may face periodic pullback pressure.
Overall, in the first half of the fourth quarter gold may continue a slow recovery, with prices potentially probing market buying sentiment again at $4,800–5,000 per ounce, but in the second half of the quarter it is advisable to turn cautious, as the market may shift back to a wait-and-see stance or even a pullback due to the Fed's December meeting stance and uncertainty over next year's monetary policy.
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