Gold prices dropped by 0.19% on Monday amid growing trade tensions, even as the US holds discussions with the EU and Mexico. Currently, gold is priced at $3,347 after reaching a daily peak of $3,374. US President Donald Trump has imposed 30% tariffs on imports from the EU and Mexico, causing disruptions in the market. Trump’s remarks about possible future trade talks with Europe have also pressured gold prices downward.

Geopolitical Tensions

The geopolitical landscape is becoming more strained, with the US considering supplying arms to Ukraine and potentially imposing tariffs on Russia. Analysts are closely watching key economic indicators, including US inflation rates and retail sales, along with statements from the Federal Reserve. Gold has remained stable between $3,300 and $3,350 due to trade tensions and the stronger US Dollar, which has led the Dollar Index to rise by 0.25% to 98.10. Additionally, increasing US Treasury yields are impacting gold’s performance. Important data on the US Consumer Price Index is expected soon, with a forecasted increase from 2.4% to 2.7% year-over-year. The Federal Reserve’s policy may be under review, as some officials see potential rate cuts in 2025. Gold remains a safe-haven asset amidst economic uncertainty, protecting against inflation and currency devaluation, driven by central banks’ investment strategies. In 2022, central banks purchased a record 1,136 tonnes of gold. Gold prices generally move in the opposite direction of the US Dollar and US Treasuries, influenced by geopolitical events and economic changes.

Derivative Trading Strategies

Given the current market, traders should be prepared for a significant shift. The ongoing stability between $3,300 and $3,350 is misleading, hiding a fierce competition between macroeconomic forces. On one side, we have strong headwinds: a robust US dollar, with the Dollar Index nearing 105.5, and the 10-year Treasury yield stable above 4.4%. These factors put pressure on non-yielding gold. Past comments about trade negotiations further suggest potential easing of tensions, which could lower safe-haven demand. However, we believe that underlying pressures are mounting for a price increase. The anticipated rise in the Consumer Price Index to 2.7% is already outdated; recent data shows inflation in the US running at 3.5% annually. This persistent inflation enhances gold’s role as a reliable store of value. Moreover, the record gold purchases by central banks in 2022 aren’t a one-time event but rather the beginning of a continuing trend. According to the World Gold Council, central banks added a net 290 tonnes in the first quarter of 2024, marking the strongest start to any year on record. This institutional demand is setting a strong price floor. For derivative traders, the current low-volatility environment presents an opportunity. The CBOE Gold Volatility Index (GVZ) is near 16, a seemingly complacent level given the geopolitical situation. This offers relatively inexpensive options for buying. We recommend strategies that could benefit from an increase in volatility rather than outright futures positions. Long straddles or strangles may be effective for profiting from sharp price moves, particularly with an upward bias. We’ve seen similar scenarios before. In the late 1970s, rising interest rates and a strong dollar initially put pressure on gold, just as we’re seeing now. However, escalating geopolitical instability ultimately led to a significant rally for gold. Current tensions suggest we may see that pattern repeat. A glance at the options market reveals a growing shift, with out-of-the-money call options priced higher than equivalent puts, indicating that traders are positioning themselves for a sharp upward move. Hence, we favor buying call spreads to manage risk while aiming for a breakout above recent highs, using the market’s current calm to establish positions ahead of a potential surge. Create your live VT Markets account and start trading now.

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