Gold Bull Run Has Legs but Pullback in the Cards

Overview:

• Gold prices have reached record highs driven by several economic factors in the U.S.
• The rapid rally makes gold look overbought with potential for short-term correction
• Long-term outlook remains bullish and could see new records in the first half of 2026
• Central banks have been major buyers and could have room for more accumulation, supporting prices for years
• Risks from U.S. debt and tariffs may weaken Treasuries and U.S. dollar, further boosting gold's appeal

Gold has powered to over US$4,000 per oz recently, setting consecutive records along the way. Traders placed bids in response to firm expectations the Federal Reserve has embarked on an easing cycle, even as inflation is set to move further away from its inflation target. The ever-louder narratives surrounding de-dollarization and de-globalization, aggressive official sector purchases, China offering to be a bullion custodian for foreign central banks and the reduced carry and opportunity costs as the yield curve responded to rate expectations, have all galvanized demand. Western investors grew their physical exchange-traded fund (ETF) and derivative exposure, motivated by the fear of missing out and assumptions the U.S. government shutdown will augment rate cuts.

Given the speed and magnitude of the rally since mid-August, which saw the yellow metal jump nearly $670 per oz (20%), there is a risk that Commodity Trading Advisors (CTAs) and others may be tempted to take some profits, as the "perfect" environment seldom holds consistently. The yellow metal looks overbought, which suggests that anything that may question the speed of the Fed's easing, or an increase in volatility, could generate a robust downside. This could see a significant unwind of the latesummer rally in the relative near-term. While the metal could drop off its recent highs, we expect average price to reach a new record in the first six months of 2026, as the Fed eases into a higher inflation environment, official sector keeps buying and discretionary funds again position long.

Steeper Yield Curve, Fear of Missing Out Key Reason for Record Gold

The yellow metal has jumped to an all-time high recently, which was also higher than the record inflation adjusted price reached back in early 1980. Traders placed bids in response to firm expectations that the Fed has embarked on an easing cycle, as it tilts policy toward its maximum employment mandate under the Federal Reserve Act.

Money managers who likely missed much of the early part of this year's rally, due to their discomfort of getting long while short term rates were high, have now moved into the yellow metal through the late summer, as their carry costs were expected to drop along with the Fed's renewed enthusiasm to ease.

Traders were betting that the U.S. central bank will cut rates, as inflation moves further from its two percent inflation target. This would bring real rates on the short end of the curve sharply lower. As such, physical gold ETF holdings jumped some 13.8 million oz (+17%) since the start of the year, non-commercial length increased too. All this was happening as monetization and de-dollarization themes convinced the market that central banks will continue to aggressively grow their exposure to the yellow metal, continuing the trend of 1,000 tonnes of annual purchases into the future.

Dropping Real Fed Funds Rates Typically a Good Omen for Precious Metals Space

Inflation Edging Further Away from Inflation Target

Back in January 1980, the yellow metal hit its record some five months before real rates went sharply lower. Then Chair Volker clamped down on inflation and gold went south. But there is no Volker-like figure in the offing. Instead, The Federal Open Market Committee (FOMC) may be filled with relative doves come May 2026 who see the two percent inflation as a suggestion and not a hard target, which must be reached at any cost. Some investors and central banks are also likely concerned that the U.S. central bank may deploy a form of quantitative easing to suppress the longer end of the yield curve to lower the funding costs, where actual lending happens.

This would mean that U.S. paper may have a hard time compensating for inflation. Given gold's ability to reflect inflation, owing to the fact it requires labor and productive capital to produce, it may be a better safe haven than Treasuries. Add to that the fact that ore grades are dropping, the increased use of these factors of production suggests that gold would be better at protecting purchasing power. Hence, the specs who missed much of the recent gold upward run may want to position into the yellow metal as they seem to be underinvested. With portfolio managers now increasingly talking about 25-25-25-25 portfolios or some similar combination, which would include gold and commodities as a tranche, investor demand may become quite robust into 2026. A portfolio allocation tilt toward gold and commodities, and away from a standard 60-40 equity-bond allocation, would be a very accretive game changer for gold and friends.

ETFs Finally Helping Gold

But Rallies Seldom Go Uninterrupted

Considering the speed and magnitude of the late-summer gold surge rally, there is a risk that systematic trend following fund Commodity Trading Advisors (CTAs) and other algorithm-driven asset allocators are setting up to reduce length. Indeed, CTA have already reduced their positioning from a 70% of maximum length to 45%, but for now that did not lead to any major unwind or prevented prices from hitting new highs. However, if the current perceived "perfect" environment for gold wanes a little, we could see ETF investors take profits, which can trigger CTA's to follow the trend lower, particularly if vol (volatility) spikes. It should be noted, trend following funds are also vol-targeting, which suggests that higher volatility will force a selloff as it increases value at risk. Stronger-than-expected U.S. economic data, a government reopening or anything which reduces rate cut expectations could send vol higher. One should keep in mind that the current Fed is very much a data-driven institution and is likely to respond to positive surprises.

Since algorithmic funds are heavy on long exposure, this would mean that there could be a long liquidation in the event vol spikes. This could trigger a technical sell-off as well. Based on measures such as the Relative Strength Index (RSI), gold is significantly over-bought. Plus, gold is trending some 25% above the 200-day moving average (dma), and historically, premiums of above 20% don't tend to last. This implies that it would not take too much to see a correction back to below US$3,600/oz in the relative near-term.

Short-Term Correction Yes, But Long-Term Looking Accretive

While a data and volatility inspired correction is a real possibility, we don't expect a sustained rout. In fact, we see gold moving materially higher into 2026 once it becomes apparent that the Fed is continuing with the easing cycle amid a weaker economy, higher inflation and a U.S. central bank that will be filled with doves.

U.S. debt, which in September 2025 was estimated to be US$37.43 trillion and some 125% of Gross Domestic Product (GDP), is growing at an alarming rate after the passage of the Big Beautiful Bill Act. There is also a risk that tariffs may be judged to be illegal, and the government will need to rebate the revenues it collected, increasing the deficit even higher.

The concern is that this debt may need to be partially monetized by artificially keeping short- and long-term rates low and implying gold could be a better yielding instrument. There is little appetite for higher taxes in the U.S. and potentially insufficient demand from global investors to absorb all this paper. Additional competition from trillions of new Eurobond issues, as countries in Europe embrace deficit spending and grow their military footprint, may be an additional reason why all the issued Treasuries may not be easily absorbed.

Lower USD holdings from trade with the U.S. in the new tariff environment may well add to these concerns. If uber-high U.S. tariffs remain, the world may trade around America, reducing the need for greenbacks. Any material USD devaluation would be favorable for gold.

Tariffs and a turbulent U.S.-China relationship is likely the reason China has little appetite for Treasuries, and we see its current account surplus being used to buy gold and commodities. Sky-high tariffs also reduce available dollars held by exporters to purchase treasuries.

Gold investors and central banks may also worry that U.S. monetary authorities will be pressured by the Trump administration to cut rates, even if inflation is significantly above target. The concerns surrounding Fed credibility are raising speculation that there could be de facto partial monetization of U.S. debt, which would suppress real yields as inflation runs above target.

Start of USD Downtrend a Good Omen for the Yellow Metal

The Official Sector a Manna for Gold

In addition to using gold to moderate the impact of purchasing power erosion and de-dollarization, geopolitical tensions have been accretive for the yellow metal. A rise in geopolitical tensions over the last several years has seen gold become a much more important asset held by central banks around the world.

Central banks have been the big buyers, supporting the gold rally recently and for the last several years. Indeed, 2022 saw central banks buy a record 1,080 tonnes (t) of gold, a near record amount of 1,051t in 2023 and another 1,089t in 2024. This year central banks look set to buy around a 1,000t for 2025. This buying spree coincides with a trend among central banks globally to diversify their holdings to reduce their reliance on the U.S. dollar; a trend which is continuing in 2025. Indeed, central banks in aggregate hold about a quarter of foreign exchange (FX) reserve in the form of the yellow metal.

While the central bank of Poland, Kazakhstan and Turkey have been aggressive buyers, it is the People's Bank of China (PBoC) who has been on the forefront of investor chatter due to its size. It snapped up the yellow metal for the last two years — with its holdings rising sharply to 2,302t in August. But that still represents only 7.6% of its $3.317 trillion FX reserve. There is much more room for China to grow its gold holdings, when compared to the nearly 75% U.S. share. At current prices, a 10% increase in Chinese FX gold translates to a purchase of some 2,600 tonnes. This suggests that if China truly is diversifying from USD, its purchasing program will take many years.

New Record in The Cards

Gold's new range seems to be $3,500-4,400/oz. In order for prices to go through that lower bound and to stay below the lower end of the range, it may take a shift in investor attention back to rising U.S. risk asset prices, a view change that the U.S. economy will not weaken and no rate cuts. But we suspect that the economy will weaken, risk markets may have a difficult time rallying and we expect the U.S. central bank to cut, even as inflation stays stubbornly above the two percent inflation target.

Signs that demand for the yellow metal should increase into 2026:

• Lower interest rates at a time when inflation is increasing,
• less appetite for Treasuries as U.S. debt surges to new records and fears grow that the world will have less need for U.S. dollars and
• less available for treasury purchases by foreigners given a high tariff environment and the prospect of trillions of Eurobonds competing for capital.