Falling below 4000, is the gold price correction nearing its end?

From a spatial perspective, gold’s short-term pullback has already entered “deep waters,” and the market may be waiting for tail-end risks to be exhausted. In our previous analysis “Has Gold Fully Priced in Short-term Bearish Factors?”, we emphasized that if a “fat tail event” in oil prices occurs, gold could experience “concentrated selling in a liquidity squeeze.” The 3-month at-the-money option IV for gold remaining at 20%-30% corresponds directly to a maximum drawdown of 9%-15%. London spot gold breaking below $4,000/oz means that, since August 25, 2026, the maximum drawdown for gold has now exceeded 15%. In the short term, the market may be awaiting the clearing of tail risks.

So, from a temporal perspective, as gold gradually enters the “second half” of a bear market, what short-term factors or catalysts might trigger an oversold rebound?

First, the market correcting its overreaction to “gold front-running future rate hike expectations.” Since September 2026, London spot gold’s maximum drawdown has reached as high as 11.87%. Concerns over Saudi supply tightening have continued to intensify. This has not only forced the Federal Reserve to begin a rate hike cycle in September, but also sparked market anxieties over “consecutive rate hikes.” If the fat tail risk in oil is fully released (with oil prices forming an “A-shaped structure” at the top), then gold prices may see a V-shaped oversold rebound in the short term.

Currently, the probability of a Fed rate hike on October 28 is already less than 10%. If the FOMC meeting issues dovish guidance, it could prompt a short-term “oversold rebound” in gold prices.

Second, if the U.S. becomes a “lame-duck government” after the mid-term elections, catalysts for a short-term gold rebound may increase.

On one hand, tight fiscal policy in the short term could be bullish for gold. If the Democrats control both the Senate and House or just the House, they may hinder the Trump-era tax cuts. If we compare the U.S. to “a company,” the dollar’s credit is akin to its debt servicing capability. While long-term fiscal tightening could strengthen dollar credit by reducing the deficit, in the short run it’s similar to the “company’s cash flow efficiency declining.” Short-term fiscal tightening could serve as a catalyst for a rebound in gold prices, embodying the “contradictory unity” between gold’s long-term and short-term influencing factors.

On the other hand, the probability of a U.S. government shutdown may rise, which could catalyze a short-term oversold rebound in gold. A government shutdown is akin to “a company suddenly pausing operations,” meaning its cash flow efficiency drops, leading to a short-term weakening of dollar credit, and thus a short-term increase in gold prices. For example, during the two government shutdowns in the Trump 1.0 era in 2017 and 2018, gold rose by 6% and 3% respectively.

From a medium- to long-term perspective, we believe the foundation for gold to return to an uptrend after a short-term rebound may not be strong:

First, this year’s high base effect may lead to U.S. inflation “shifting down” year-on-year in 2027, but this does not mean the Fed will “immediately slow” its rate hike pace. Currently, the Fed’s 2027 core PCE year-on-year forecast is 2.5%. While this is significantly lower than the average in 2026, it still slightly exceeds the Fed’s 2% target. Therefore, after a decline in inflation in H1 2027, the Fed could still opt for “preemptive rate hikes” to force U.S. inflation back below 2% at a faster pace.

Second, if the U.S. government becomes a “lame-duck government,” the pace of fiscal expenditure growth could slow, possibly slowing the rate at which dollar credit weakens. If the Democrats control both houses or even just the House, Trump’s tax cut policy could be hindered at the legislative level. Government spending in defense, traditional energy subsidies, and AI infrastructure may slow or face limitations, with support possibly shifting toward social welfare, thus slowing the dollar’s pace of weakening over the next two years.

Third, historical reviews show that confirmation of a turning point in gold’s upward trend usually occurs in the “second half” of the Fed’s rate hike cycle, and it may be too early to discuss the confirmation of an uptrend now. For example, in the 2016-2020 and 2022-2024 cycles, the “bear to bull” shift occurred near the pauses in rate hikes by the Fed—January 2019 and September 2023, respectively. This reflects that confirmation of an uptrend in gold is not “immediate,” and generally requires a “bumpy process.”

We believe the upper limit for an oversold rebound in London spot gold is around $4,300-$4,500.

On one hand, declining volatility is a “double-edged sword.” While the slope of gold’s decline is slowing, this also restricts the extent of its rebound. The current 3-month Shanghai gold option IV has fallen to about 21%-22%, so the space for an oversold rebound in the gold price is likely below the early August high of $4,700.

On the other hand, based on attribution analysis of gold’s decline from August 25 to October 23, 2026, worries about consecutive Fed rate hikes contributed about a 9%-12% drawdown. A rebound in London spot gold to $4,300-$4,500 would mean the risks related to consecutive rate hikes by the Fed are largely priced out, suggesting there may be no rate hike in December 2026. At this point, an oversold rally in gold may already have been over-priced.