Gold: From euphoria to consolidation – The next leg looks like a 2026 story

Gold’s extraordinary rally this year has entered a cooling phase. The metal, still up around 54% year-to-date, has just logged its first back-to-back weekly loss since June, marking a near USD 500 top-to-bottom correction from the record high reached in October. The tone during this time has shifted from exuberance to reflection, with traders reassessing how much of the 2025 narrative—rate cuts, fiscal stress, geopolitical hedging, and central bank demand—has already been priced in.

Near-term headwinds

Post-Diwali pause: India’s festive season typically delivers a burst of jewellery demand followed by a lull. The 2025 Diwali period was no exception, marked by exceptionally strong buying across precious metals—most notably silver, which saw historic retail interest, local shortages, and sharp price spikes. Gold demand was solid as well, though record prices and a weaker rupee curbed jewellery volumes. The market has now entered its customary post-festival soft patch, likely to stabilise as year-end buying returns, potentially aided by the recent correction. 

China trims its retail tax rebate: A more structural development came from China, where authorities ended a long-standing VAT exemption for certain jewellery retailers purchasing through the Shanghai Gold Exchange and Shanghai Futures Exchange. The change modestly lifts retail costs and may dampen jewellery sales. However, its macro significance is limited. Investment gold—bars, coins, and ETFs—remains fully exempt, ensuring the key channels that have driven China’s record physical demand stay intact.

Powell’s “wait and see” and a firmer dollar: After delivering an October rate cut, the Federal Reserve signalled that December is “not a foregone conclusion.” Just like everyone else the current US government shutdown means the FOMC is flying blind and Chair Powell’s cautious tone lifted the dollar and nudged real yields higher, further cooling enthusiasm as the market is pricing in a slower glide path for policy easing.

U.S.–China deal failing to address key structural issues: Late October brought another round of headlines about progress between Washington and Beijing—tariff adjustments, cooperation on fentanyl precursors, and hints of relaxed export controls. The market reaction was muted. Investors recognise that the deeper strategic tensions remain unresolved, particularly around technology, supply chains, and industrial policy. The announcement may have reduced tail risks but did little to change the longer-term case for owning defensive assets.

Technical tone and sentiment

The correction seen so far has from a technical perspective been relatively moderate considering two consecutive weekly losses followed a nine-week surge that lifted prices more than 27%. In our opinion this correction, whatever painful to recent buyers, has been a healthy development suggesting the market is releasing pressure rather than reversing trend. Support has been building near USD 3,835–3,878, an area that aligns with the 50% Fibonacci retracement of latest run up since August as well as the 50-day moving average.  A deeper slide cannot be ruled out if equity market risk appetite stay buoyant and the dollar continues to firm.

ETF holdings rose sharply during the rally, up 484 tons year-to-date, and have since steadied at levels still exceeding the combined outflows of the past three years. Futures data, despite missing weekly COT updates, suggest only moderate long reduction rather than widespread liquidation. Meanwhile, central banks remain a key source of stability, with the World Gold Council reporting Q3 official purchases of 220 tonnes, lifting year-to-date buying to 634 tonnes—close to last year’s record. This persistent official demand continues to limit downside volatility.

Why the bullish case remains intact

While near-term momentum has stalled, the fundamental reasons for holding gold remain intact—only the timing of the next advance in our opinion is uncertain.

Fiscal debt concerns: The U.S. debt-service burden is rising faster than revenues, pushing policymakers toward implicit financial repression. Real rates may stay artificially low over the medium term, which historically favours gold.

Currency debasement and diversification: The persistent use of monetary expansion to fund fiscal priorities continues to erode confidence in fiat currencies. Investors and central banks alike are holding more tangible reserves as a safeguard.

Official-sector demand: Central banks, led by emerging-market institutions seeking reserve diversification, are maintaining strong appetite for bullion. Their steady accumulation has become a structural feature of the market and a key support in times of speculative liquidation.

Policy trajectory: Even with Powell’s current caution, the macro data suggest the Fed’s next sustained move will still be toward easing. A softening U.S. labour market and slowing nominal growth will likely bring additional cuts into 2026, setting the stage for renewed gold strength, especially if inflation remains sticky around 3% or higher. 

Short-term outlook

The recent correction suggests that the year’s high may already be in place, though it appears more like consolidation than capitulation. The underlying drivers that lifted gold above USD 4,000—fiscal fragility, inflation persistence, and steady official-sector demand—remain intact. A deeper pullback cannot be ruled out as the market works off speculative excess and rebuilds conviction.

The last major consolidation following the May record high near USD 3,500 lasted roughly four months before the August breakout triggered a nine-week, 27% advance. A similar duration this time could imply another period of sideways trade before renewed strength into early 2026. Until then, elevated volatility and alternating sentiment swings may test short-term conviction on both sides of the market.

Gold’s pause still looks like a breather, not a breakdown. Seasonal softness, temporary Chinese policy noise, and a firmer dollar explain the short-term retreat, but none change the longer-term narrative. Once this corrective phase runs its course, the same forces that fuelled this year’s rally—debt, inflation, and diversification demand—are likely to reassert themselves, making the next meaningful leg higher a 2026 story.