The Pullback: Why Corrections Strengthen a Bull Market

5 min read

October gave gold holders both sides of the market in a single month. On 8 October gold passed another milestone, a round number it had never reached before. On 20 October it set a new record high. The next day it fell by as much as 6.3%, the sharpest one-day drop since 2013. This week it remains below that peak. For a long-term holder, none of this is a reason for alarm. It is how strong markets behave.

What happened in October

The rise into the record was steep. Gold had climbed by roughly a third in two months, carried by rate cut expectations, a weaker dollar and the American government shutdown. Markets that move that quickly attract short-term traders. When the price turned, those traders sold together and the fall fed on itself.

It helps to remember how far gold had come before the fall. A price that rises that fast will always attract people who plan to hold for days rather than years. When they leave at the same moment, the price drops quickly, which is exactly what happened on 21 October.

What did not change was the reason gold was rising in the first place. On 29 October the Federal Reserve cut its main rate for a second time this year, to a range of 3.75% to 4%. It also said it will stop shrinking its balance sheet from 1 December. That is a central bank moving back towards easier money. Gold still ended October higher than it began, its third monthly gain in a row.

We have seen this before

We wrote in May about the sharp swings of April, when gold set a record high on 22 April and then pulled back quickly. Volatility is the price of admission, we said then. Within six months of that pullback, gold had gone on to set fresh records well above it. The pattern is worth remembering now. A record followed by a sharp fall is not unusual in a strong market. It has happened before and the market has recovered before.

Corrections inside every great bull market

History shows that pullbacks are not the end of a gold bull market. They are part of it.

The 1970s. Gold rose more than twentyfold between the start of the decade and its peak in January 1980. In the middle of that run, between late 1974 and the summer of 1976, the price almost halved. Many holders gave up. Those who stayed saw it rise more than eightfold from the low.

That fall came at a hard moment. American consumer prices had risen 9.6% in 1973 and 11.8% in 1974. The Federal Reserve had pushed its key rate up to 9.71% by November 1973 and a recession ran from November 1973 to March 1975. High rates and a shrinking economy made cash look attractive for a while. The inflation that had driven gold higher had not gone away, though, which is why the rise resumed once the squeeze eased.

2006. In May 2006 gold reached its highest level since 1980, then fell by more than 20% in a matter of weeks. Less than two years later it had passed its 1980 record.

2008. During the financial crisis, gold dropped by almost 30% between March and October as holders sold whatever they could to raise cash. By 2011 it had more than doubled from its low.

Each of those falls felt dramatic at the time. None of them changed the direction of travel, because none of them changed the cause. In every case the cause was the same: governments and central banks creating money faster than the economy could absorb it.

Why corrections make a market stronger

A pullback clears out speculative money. Traders using borrowed funds are forced to sell. Weak hands leave. What remains is a market held by buyers who intend to stay.

Here is how that works in practice. A trader who buys gold futures puts down only a small deposit, known as margin. In effect, the rest is borrowed. If the price falls, the broker asks for more money. A trader who cannot pay is sold out automatically. When thousands of positions are closed at once, selling breeds more selling until the borrowed money has gone. After that, the price rests with people who own their gold outright and are under no pressure to sell.

Those buyers are still there. The World Gold Council reports that central banks bought 220 tonnes of gold between July and September, up 28% on the previous quarter. Total gold demand reached 1,313 tonnes, the highest quarter on record. Demand for gold bars and coins worldwide reached 316 tonnes, up 17% on a year earlier. Reports in the days after the fall described buyers in Asia, America and Europe stepping in at lower prices.

The quarter before told a similar story. Between April and June, bar and coin demand rose 11% on a year earlier to 307 tonnes. Gold-backed funds took in 397 tonnes over the first half of the year, the most for any first half since 2020. Buying on that scale, across two quarters in a row, is not the behaviour of a market about to give up.

The monetary picture has not changed

American government debt has passed $38 trillion. Britain's net debt is close to the size of its whole economy. Interest rates are being cut while inflation sits above target on both sides of the Atlantic.

Central banks are slowing or ending the shrinking of their balance sheets. The Fed will stop from 1 December. In September the Bank of England cut the amount of gilts it plans to reduce over the coming year from £100 billion to £70 billion, which will leave it holding £488 billion. Both moves point towards money becoming easier, not tighter.

None of that was reversed by one bad day in the gold market.

What it means for savers

For someone holding physical gold, a correction is a test of patience rather than a change in the story. Those who think in years rather than days tend to see these moments as part of the journey. Many of our customers add to their holdings slowly over time, so no single price matters too much.

There is a simple reason many people prefer this approach. Buying in stages means some purchases are made after a fall as well as after a rise. Over time that smooths out the price paid. It also takes the pressure off trying to judge the perfect moment, which nobody can do reliably.

Physical coins held outright also bring a kind of calm that borrowed positions cannot. Nobody can force the sale of a coin you own outright. There is no lender to repay and no margin call to meet. On a day like 21 October, that difference matters a great deal.

UK legal tender gold coins such as the Britannia and the Sovereign are exempt from Capital Gains Tax for UK residents. With the Budget three weeks away, that is a feature worth understanding.

Speak to a specialist

If you would like to talk it through, call a specialist on 0208 064 0076, Monday to Friday, 9am to 5pm, or book a call at a time that suits you.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.