Potential catalyst for significant gold selloff

The bullish momentum in gold continues to surge as bearish catalysts remain absent. However, a notable pullback occurred at the end of September and the start of October due to a repricing in aggressive rate cut expectations, leading to an increase in real yields which weighed on the market.

Despite the record-high positioning in the market, there are still many investors shorting gold at every new high in an attempt to catch the peak. While this cautious approach is understandable, it’s important to note that in the markets, an already expensive asset can become even more expensive without a significant catalyst prompting a reevaluation.

Looking at the chart indicating record-high positioning, we can observe levels last seen in 2016 and 2020. From a broader perspective, gold remains on a bullish trajectory as real yields are expected to continue decreasing amid the Federal Reserve’s easing cycle. While pullbacks may occur due to a reassessment of rate cut expectations, as long as the Fed’s response remains consistent, the overall upward trend should remain intact.

One significant event that could potentially trigger a sharp decline in gold prices is the upcoming US election. Should Trump emerge victorious again, it is likely to result in higher real yields due to anticipated growth and reduced expectations of further rate cuts. Notably, the previous Trump victory led to a 16% drop in gold prices (as shown in the chart below).

Conversely, if Harris is successful in the election, the status quo is likely to be maintained, and gold may continue its upward trajectory, with pullbacks potentially driven by adjustments in rate cut expectations in response to strong US economic data.