Everbright Futures 1102 Gold Review: Interest Rate Pressure – Can Gold Go Even Lower?

Last Friday (October 30th), spot gold fell below $3,900/oz, dropping more than 3% in a single day and closing below $3,900 for the first time since last October; spot silver plunged as much as 6.0% during the session. In the short term, gold may continue to face downward pressure. This week, attention will focus on Tuesday’s US midterm elections and Friday’s October nonfarm payrolls and unemployment rate data.

This decline was driven by the resonance of four forces: First, the Federal Reserve paused rate hikes, but its hawkish stance remained unchanged. The Fed’s October meeting kept the interest rate at 3.75%-4.00%, with the vote showing continued internal division—Committee members Cook and Harker favored an immediate rate hike. The statement upgraded the economic assessment to "strong," and the September PCE remained at 3.6%. As a result, markets quickly factored in the possibility of another rate hike at the December meeting, pushing both nominal and real interest rates higher and increasing the holding cost of gold. Second, the "Middle East geopolitics–oil prices–inflation" chain is persisting and intensifying. Restrictions in the Strait of Hormuz, escalation in the Bab el-Mandeb and Red Sea, attacks on Saudi pipelines, deadlocked US-Iran negotiations, and ongoing Houthi-Saudi conflicts have pushed oil prices above $100/barrel, with diesel prices hitting record highs, boosting inflation expectations and reinforcing tightening expectations. Third, liquidity-driven sell-offs have re-emerged. Tech stocks on Wall Street tumbled (with Intel’s guidance missing expectations and Amazon’s capital expenditures surging), triggering AI returns concerns. Institutions have been forced to sell other risky assets to meet margin calls, and historically gold is also susceptible to such sell-offs. Fourth, long positions exited due to uncertainty. Gold prices lacked upward momentum, breaking key levels and triggering programmatic stop-losses, amplifying the decline.

The rapid drop in gold prices and the triggering of mass stop-losses, in my view, represent a concentrated clearing of stop-loss orders rather than a complete reversal of the fundamental trend. There is potential for a rebound in November, anchored by two key themes: the midterm elections and the December interest rate path. From the midterm elections perspective, the results will directly reshape market pricing for US fiscal expansion, trade, and geopolitical policies. If Congress ends up divided, it will become more difficult to roll out large-scale fiscal stimulus, marginal demand will cool, and expectations for persistent inflation will weaken, leading to a potential pullback in long-term US Treasury yields and creating a window for gold to recover. If the ruling party gains the upper hand, markets will once again trade on deficit expansion and inflation stickiness, maintaining upward pressure on interest rates and limiting rebound potential. Additionally, policy uncertainty ahead of the election itself will bring temporary risk hedging premiums, but such rebounds are mainly risk premium corrections and are pulse-driven, with sustainability depending on how the election results influence subsequent White House policies. Previously, the main driver of gold’s decline was the expectation of another Fed rate hike this year, and the market has largely priced in a 25bp hike in December. Even if the December rate hike occurs, should the Fed signal “the end of this rate hike cycle” during the meeting, markets will quickly price in the end of rate hikes and move forward expectations of rate cuts, leading to a classic rebound after bad news is fully priced in. Conversely, if inflation rebounds again and expectations for a December rate hike strengthen, any technical rebound after this oversold stage will only provide temporary relief, and gold will continue to face pressure afterwards.

Overall, while there is a rebound opportunity for gold, in the short term it should still be seen as a tactical correction rather than a trend reversal. The rebound window will be concentrated between the election outcome and the data observation period before the December Fed meeting. It is necessary to closely monitor how inflation and employment data continue to affect interest rate pricing.

Written by: Li Qi

Professional Qualification: F3046227

Trading Advisory Qualification: Z0016145

Editor: Zhu Henan