Gold is stabilizing above $3,900 after hitting a three-week low. This is the third day of losses, as improved risk appetite decreases the demand for safe-haven assets. The drop is influenced by optimism for a potential US-China trade agreement. However, factors like the ongoing US government shutdown and the expected easing of monetary policy by the Federal Reserve may limit further losses. The price of gold has corrected nearly 10% from its recent peak of $4,381. Traders are taking profits and adjusting their portfolios ahead of an expected interest rate cut by the Fed. Analysts believe that gold will average $4,275 per ounce by 2026, driven by geopolitical uncertainty and ongoing demand from central banks.

Technical Analysis and Predictions

Technical analysis indicates a bearish trend, with XAU/USD showing lower highs and lows on the 4-hour chart. The price remains below key moving averages, confirming a short-term downward trend. The Relative Strength Index points to possible short-term consolidation before the broader downward trend resumes. Analysts highlight that central banks hold large gold reserves, and the price of gold generally rises when interest rates fall and the US Dollar depreciates. Gold’s importance as a store of value and hedge against inflation is crucial. Central banks, especially in emerging economies, are increasing their reserves due to geopolitical uncertainty and currency fluctuations. With gold recently correcting 10% from its all-time high, there is a clash between risk appetite and dovish monetary policy. Optimism around US-China trade talks is currently driving prices down toward $3,900. This situation is creating short-term opportunities for bearish trades, as the downward trend is technically confirmed. Traders should pay attention to the upcoming meeting between the US and Chinese presidents on Thursday, as positive news could prolong the sell-off. Since the price is currently below key short-term moving averages, selling during rallies toward the $4,050 resistance area or buying put options could be wise strategies. The market is clearly leaning towards riskier assets, which negatively impacts gold.

Federal Reserve’s Impact

However, the Federal Reserve’s decision on interest rates this Wednesday could serve as a significant opposing force. A rate cut is already expected, but a notably dovish statement from Chair Powell could quickly reverse the recent downward trend. This means holding short positions through the announcement could be risky, so traders might consider buying call options in anticipation of a rebound driven by the Fed. Expect high volatility this week, making strategies that benefit from large price swings, like straddles, potentially effective. Key levels to monitor include the support zone around $3,890-$3,900, which has held so far. A solid break below this level could lead to a deeper drop toward $3,800 in the coming weeks. For context, the ongoing US government shutdown is now in its 35th day, matching the longest shutdown from 2018-2019, which could act as a floor for gold prices. Additionally, the latest CPI data from October 15th showed core inflation at 3.1%, supporting the argument for gold as an inflation hedge. Last week, data from the World Gold Council noted a net outflow of 1.2 million ounces from gold-backed ETFs, confirming recent profit-taking. Looking back, a similar trend occurred in late 2024 when trade optimism caused a sharp drop, followed by a rebound after the Fed reaffirmed its easing policy. The long-term outlook remains positive, with central banks continuing to buy gold and analysts predicting higher prices into 2026. Thus, this dip may offer a strategic entry point for those with a long-term bullish perspective. Create your live VT Markets account and start trading now.

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