Gold Market Commentary: Where floor art thou?

When the leverage breaks

Gold finished October at US$3,913/oz, down 6.3% m/m, with declines across all the major currencies we track (Table 1).

Our Gold Return Attribution Model (GRAM) suggests that lower yields supported gold in October. But gold and yields moved in the same direction during the month, an unusual pattern that GRAM doesn’t capture. Three factors likely drove this: Fed rate-path repricing, speculative de-grossing¹, and a temporary rotation from equities and gold into bonds, as stocks fell and credit spreads widened. Much of the selling may have been derivatives-led.

COMEX managed money net positions fell US$7bn (53t) in October, following a larger drop in September. However, open interest dropped more, as non-reportable and spreading net positions fell during the last week of October. This contributed to the negative residual in our model.

Global gold ETFs defied the price decline, registering US$2bn (16t) of inflows. Europe led, followed by Asia while North America posted a small decline.

Where floor art thou?

• Our simple framework suggests gold may be nearing an interim bottom: two of three conditions are in place
• More importantly, unlike in 2011, the macro backdrop supports a recovery.

With the spot gold price around 25% below its January all-time high, a persistent question from investors is whether we are close to a floor. Naturally, this is difficult to answer. For many commodities, the economics of primary supply provide part of the answer, but not for gold. A measure of fair value could offer a useful reference point, but as it is with equities, fair value is a poor timing tool.

So rather than nail down a precise floor, we posed the question: what conditions were historically in place when gold recovered during a downtrend?

We focused on bear regimes over the past 20 years², defined as periods when gold's 50-day moving average has stayed below its 200-day average for at least a month. We tested a broad set of candidate indicators³. Three stood out, each capturing a different part of a sell-off; in each case, a signal ‘fires’ when its reading is among the most extreme 30% of bear-regime months:

• Dislocation: gold trading well below its 200-day moving average. This measures how stretched the sell-off has become.
• Dollar strength: a sharp rally in the US dollar (DXY) relative to the past 52 weeks. When gold has fallen because the dollar has spiked, the weakness has tended to be temporary, reflecting perhaps currency moves rather than weaker gold demand.
• Positioning washout: speculative futures positions - combining managed money and smaller traders - falling to unusually low levels relative to open interest. Rallies need fuel, and once the weaker speculative holders have sold, there are fewer sellers left.

On its own, gold trading well below trend has been a reasonable but imperfect guide to forward performance. Forward returns improved materially when the sell-off was accompanied by a dollar spike and a clear-out in speculative positioning. Historically, when all three conditions were met, gold was higher three months later in every case (Table 2). That said, the sample is small with just five episodes. But at least two of the three provides some confidence in positive forward returns.

Are we there yet?

Today, two of the three conditions are in place (Figure 1). Gold is trading well below its 200-day average and the dollar has rallied into its top tier. Positioning, however, remains elevated. Speculative froth has not yet been fully cleared, and - consistent with past corrections - a further shake-out in futures positioning would need to take place before a more durable recovery can take hold.

Indicators are useful, but context matters more

It's important to note that this framework only speaks to the next three months. It says nothing about the year ahead, or whether a durable uptrend resumes. That rests on the broader strategic case for gold.

On that front, the macroeconomic and fundamental context arguably matters more. Some investors may look to the 2011 peak as a parallel. But to us, that comparison is misplaced. The post-2011 multi-year sell-off came amid conditions that were far less favourable for gold, as Table 3 shows.

The fundamental backdrop increases the likelihood that this is a correction rather than the start of a prolonged downtrend. That said, our simple framework suggests the setup is not yet complete. And while the path of least resistance for many of the factors in Table 3 is favourable over the medium term, they could move against gold in the short term, particularly given event risks in Q4 from policy decisions and geopolitical triggers.

For investors watching from the sidelines, the signal to look for is a clear-out in positioning. If that comes while the other two conditions hold, the current set-up would match the episodes that have historically marked attractive entry points. Other technical indicators tell a similar story.

Other technicals tell a similar story

Technically gold has moved to what we typically identify as a downside “extreme” - 10% below its 200-day average - and remains above support from the 38.2% Fibonacci retracement of the entire rise from 2015 at US$3,857/oz (Figure 2).

This suggests that gold is in a location and condition where signs of a potentially important floor can be looked for. It does though still look premature to make this call as momentum continues to trend lower. This would suggest a test of US$3,857/oz may yet be seen, although that level would likely become an attractive entry point for investors.

In summary

This framework is not a trading rule and isn't meant to encourage tactical trading. We see it as a simple heuristic for judging whether a sell-off is starting to look stretched, based on a small number of episodes and a three-month horizon.

It suggests the setup for a recovery is building but not yet complete. The broader backdrop points to a correction rather than a repeat of the post-2011 downtrend – a parallel some investors are keen to draw.

Event risk over the rest of 2026 could still push gold either way. The policy outcomes of the US midterm elections are likely to be pivotal. And further cracks in equity markets and credit could make Treasuries more attractive, bringing back the unusual positive correlation between gold and yields we’ve witnessed over the past few weeks. But that rests on the inflation threat fading. And that isn’t clear either.

For strategic investors, averaging into weakness has historically made sense for an asset that has returned close to 9% a year since 1971. So the more useful question is not where the floor is, but whether weakness is becoming an increasingly attractive opportunity to add.