Gold Price Correction Unfolds Amid Revised Rate Cut Expectations

The gold market has entered a corrective period following its recent surge to a new record high. After reaching an all-time peak of $2,708.70 on October 1, 2024, gold prices have steadily declined, shedding approximately $68 in just eight days. This shift marks a significant departure from the bullish momentum that had propelled gold to unprecedented levels earlier this year.

Initially, the price decline appeared to be a consolidation phase, with daily losses remaining shallow and fractional. However, the pace of the decline has accelerated, confirming that gold is experiencing a genuine correction rather than a mere consolidation. Today, the most active December gold futures contract settled at $2,640.60, after factoring in today’s $21.30 decline. 

Several factors have contributed to this correction, with dollar strength emerging as the primary catalyst. The greenback has regained its status as the preferred go-to safe-haven asset amid geopolitical uncertainties.  Also, the resurgence in dollar value is closely tied to shifting expectations regarding upcoming Federal Reserve interest rate decisions.

Market sentiment has undergone a notable transformation in recent weeks. Previously, there was considerable speculation about the possibility of a substantial 50 basis point rate cut at the November Federal Open Market Committee (FOMC) meeting. However, this scenario has now been largely discounted by market participants.

According to the CME's FedWatch tool, which gauges market expectations for Fed policy changes, there is now an 86.7% probability of a modest 25 basis point rate cut in November. The remaining 13.6% reflects the possibility of no rate change at all. Strikingly, the probability of a 50-basis point cut has been reduced to zero, highlighting the dramatic shift in market sentiment.

This recalibration of rate cut expectations has pronounced impacted the gold market. The precious metal typically benefits from lower interest rates, as they reduce the opportunity cost of holding non-yielding assets like gold. With the prospect of a smaller rate cut on the horizon, some of the bullish momentum behind gold has dissipated.

Despite the current correction, many analysts believe that the long-term outlook for gold remains positive. The fundamental factors that drove gold's impressive rally earlier this year – including economic uncertainties, and geopolitical tensions continue to provide underlying support for the market.

As the correction unfolds, market participants will look for signs that gold is finding price support, and look for a pivot in those areas. Once gold reaches a level that attracts investors they will return to buy the dip. That should trigger and reignite a renewed bullish trend. The depth and duration of this correction will likely be determined by evolving economic data, geopolitical developments, and any further shifts in Federal Reserve policy expectations.

While the current price action may be disappointing for gold bulls, it's important to view this correction within the broader context of gold's remarkable performance in 2024. As the market adjusts to revised rate cut expectations, the stage may be set for gold to resume its upward trajectory once a new equilibrium is established.

Wishing you as always good trading,