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Gold drew attention during LME Week, with prices up by around 60% this year. The rally has been driven by uncertainties over global trade, heightened geopolitical tensions, US fiscal stability and the Fed’s independence. The start of the Fed’s easing cycle also boosted gold, which doesn’t pay any interest. The rally has been driven by physical buying, with central banks and private investors accumulating gold at record volumes.

But after a weeks-long rally that saw the precious metal hitting successive record highs, gold slid the most in 12 years this week. This signalled that some momentum might have been stretched. Gold was dragged down by a combination of factors, including profit-taking across precious metals, easing seasonal demand from Diwali, positive trade talks between China and the US, uncertainty over investor positions amid the US government shutdown, and a stronger dollar. The pullback underscores the risk that the rally might have moved ahead of underlying fundamentals.

But despite this sharp pullback, gold’s outlook remains constructive, underpinned by macro uncertainty and diversification demand.

The shift in central banks’ purchases has been structural, with the pace of buying doubling in 2022 following Russia’s invasion of Ukraine. Central banks’ appetite for gold is driven by concerns from countries about Russian-style sanctions on their foreign assets, as well as shifting strategies on currency reserves. The top year-to-date buyer has been the National Bank of Poland, and it just announced it aims to increase its reserves from 21% to 30%.

ETFs have been another powerful force behind gold’s record-breaking rally this year, with holdings surging in recent weeks. In fact, gold ETFs have added as much gold in September alone as central banks did during the first quarter of this year combined, according to the World Gold Council. With ETF holdings still shy of a peak hit in 2022, there could be room for further increases.

The downside should be limited, supported by geopolitical concerns, sustained central bank demand and expectations of further monetary easing, although near-term volatility may persist. For now, gold’s pullback looks like a healthy correction within a still-positive trend.

Gold and silver wavered, after suffering their steepest selloffs in years on Tuesday as concern their dizzying rallies in recent weeks had left them overvalued.

Spot gold traded near $4,140 an ounce after tumbling as much as 6.3% in the previous session, the biggest intraday drop in more than a dozen years. Silver edged higher after being down 8.7% at one point on Tuesday. The slumps came after technical indicators showed scorching rallies for both metals were likely overstretched.

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