Gold Is Touching the July Support — But Is War Really Behind This Violent Drop?

Gold is in one of those situations where the market asks a simple question:

how can gold drop when geopolitical tensions are rising?

On the weekly XAU/USDT chart, gold has returned towards the main support area that formed around July. Price is trading near $4,100, with the broader demand zone visible around $4,000–$4,100 on the chart, and how this area reacts could be incredibly important for the next step.

But what's interesting is that this drop is not solely a result of the "war is bad for gold" narrative.

The reasons for the drop in price

Gold fell to about $4,096 per ounce on October 7, its lowest level in about two months. Reuters reports that the drop was mainly due to a stronger U.S. dollar and higher Treasury yields. The dollar index rose by about 0.7%, while the 10-year Treasury yield touched its highest level in more than two decades. ([Reuters][1])

This is because gold lacks an income stream.

When yields rise sharply, investors find other profitable assets. And the stronger the dollar is, the higher its cost is for international investors, whose buying drives the price of the dollar-denominated gold.

So we have a scenario where:

Higher yields + stronger dollar = pressure on gold.

Another factor in this scenario is that the Federal Reserve raised interest rates at its last meeting, and the market is currently pricing in an even higher chance of another hike this year. So investors closely follow today's release of the Federal Reserve's minutes to understand if any additional tightening is in the offing. ([Barron's][2])

But what about war?

That's where it gets interesting.

Geopolitical risk hasn't gone away.

The Middle East is highly volatile, oil is near the $100 level, attacks around pivotal waterways are fueling concerns about energy supply disruptions, and Yemen's Houthis have attacked oil facilities around Aden and reportedly attacked Saudi targets on October 7. ([Reuters][3])

Typically, this would be an incredibly bullish scenario for gold. But at the same time, the war is pushing down oil prices.

Higher oil prices lead to higher inflation expectations, and the higher they are, the more persistent and restrictive monetary policy will have to be to bring them back down. Such a scenario pushes bond yields and the dollar higher, which puts pressure on gold.

So the market is now caught in a strange feedback loop:

War → higher oil prices → higher inflation → higher yields → higher dollar = weaker gold.

This explains how gold can decline when geopolitical tensions rise.

The $4,000 area is the battleground.

The technical picture is also very interesting.

On the weekly chart, gold is returning to the main support/demand area that was formed around the July lows. In addition, the $4,000 area is also regarded by market analysts as an important level where long-term buyers could appear. ([Wall Street Journal][4])

A solid defense of this zone could lead to a nice relief rally. On the other hand, a decisive breakaway from this level could trigger a deeper correction before the bulls return to the offensive.

On the fundamental side, the market still has a solid cushion that protects it from further selloffs: the demand from central banks. China continued its gold buying binge in September, and the country has bought gold for the last 23 consecutive months, Reuters reports. ([Reuters][1])

The World Gold Council also highlighted that September was unusual in that gold fell more than 8% even as global gold ETFs saw significant inflows. This suggests that the recent drop has been fueled significantly by liquidations in the futures market, and macro-driven positioning, rather than a true lack of investment interest. ([World Gold Council][5])

Final thoughts

Gold is not necessarily losing its safety status — currently, the macroeconomic impact of the crisis situation is temporarily overpowering the safety bid.

For me, the key area would be the $4,000–$4,100 zone.

If bulls hold on to it, gold will likely try to return to higher grounds. On the other hand, if it breaks through this zone with strength, the market may need to find a more substantial base.

The next few sessions — particularly the reaction to the Federal Reserve's minutes, Treasury yields, the dollar and oil — will show if this is just a brutal correction or if gold is about to turn around.

Gold is at support. Now the market has to prove to itself that buyers are still there.

This article is purely for educational purposes and does not constitute financial advice.