Gold has undoubtedly been one of the most watched assets this year. Driven by expectations of a sharp rate cut by the Federal Reserve and concerns about foreign governments weaponizing the dollar, gold prices have hit new highs and have become one of the best performing assets in the first three quarters of this year, even outperforming U.S. stocks.

But the party won’t last indefinitely. Gold has been trading sideways in the past few weeks. Christopher Watling, chief market strategist at Longview Economics, said that U.S. Treasury yields and a rebound in the U.S. dollar have stopped gold’s gains.

Better-than-expected U.S. economic data led the market to lower expectations for the depth of the Federal Reserve's rate cuts, which supported the dollar and put downward pressure on gold prices. Traders now see an 86% chance that the Fed will cut interest rates by just 25 basis points next month.

The dollar index is hovering at its highest level in seven weeks, making dollar-denominated gold and silver more expensive for holders of other currencies.

“The stronger dollar is currently a short-term headwind, preventing gold from setting new all-time highs,” said Peter A. Grant, vice president and senior metals strategist at Zaner Metals. But he still sees potential for gold to reach $2,700 in the short term, adding that “the longer-term target of $3,000 remains valid as geopolitical tensions and political uncertainty bring safe-haven demand as the U.S. election approaches.”

“In addition to the evolving rate (and dollar) outlook, gold is vulnerable to downside risks from a positioning, sentiment and technical modeling perspective,” Watling said.

He noted that speculative positioning is crowded, gauges of sentiment are bullish and technical indicators are at or near sell thresholds.

Gold's net long position remains elevated

Money managers cut their net long position in gold to a three-week low as of Oct. 1, Commodity Futures Trading Commission data showed on Friday.

Ole Hansen, head of commodity strategy at Saxo Bank, wrote in a note, “Net selling in gold and silver came as traders took profits in both precious metals following recent price gains which appear to be lackluster. In gold, it is noteworthy that both long and short positions were reduced as recent short sellers worried about tightening geopolitical situations while long positions held by long-term investors continued to be liquidated.”

Watling believes that "this week's inflation report and upcoming U.S. labor market data will be worth paying close attention to as they could trigger further repricing of Fed rate expectations." He is referring to the September Consumer Price Index (CPI) released on Thursday, as well as the latest weekly initial jobless claims.

Elsewhere, China’s central bank paused increasing its gold reserves for a fifth straight month in September.

IG market strategist Yeap Jun Rong said that with gold prices close to all-time highs, China may pause further stockpiling of gold in the short term, but the overall trend of increasing gold holdings is likely to continue.

The article is forwarded from: Jinshi Data