Gold prices have hit a new record high, nearing $4,240. This surge is fueled by expectations that the Federal Reserve will cut interest rates by 50 basis points. Rising trade tensions between the US and China have also increased demand for safe-haven assets like gold. Traders predict that the Fed will ease monetary policies due to worries about the US job market. Over 94% anticipate the Fed will lower interest rates to between 3.50% and 3.75% by the end of the year. Lower rates benefit assets that do not provide yields, such as gold.

Geopolitical Tensions and Gold

Geopolitical issues, including the ongoing US-China trade tensions, are supporting the gold price rally. President Trump’s announcement of new tariffs on China has increased the demand for secure investments. Technically, gold reached $4,246, showing a bullish trend supported by the 20-day Exponential Moving Average around $3,950.15. The Relative Strength Index shows strong momentum, suggesting potential gains towards $4,300; meanwhile, $4,000 acts as strong support. Gold is a traditional store of value, often used to protect against inflation and currency devaluation. Central banks, especially in emerging markets like China, India, and Turkey, have significantly boosted their gold reserves. Gold’s price tends to move in the opposite direction of the US Dollar and US Treasuries and is affected by geopolitical events and interest rates. Given this robust rally to new highs, we maintain a bullish outlook on gold. Expectations of Fed rate cuts and geopolitical tensions create a solid base for rising prices. Derivative strategies should focus on capitalizing on any further increases, like buying call options or taking long positions in gold futures over the coming months.

Central Banks and Long-Term Trends

The rising demand for gold as a safe-haven asset is part of a long-term trend. Central banks are major buyers, which supports the price. This trend mirrors what we observed in 2023 when central banks bought a record 1,037 tonnes of gold, marking one of the highest purchasing years ever. The market’s confidence in a 50-basis-point rate cut marks a shift we first saw from the Fed in late 2023. Concerns about the job market are not new; jobless claims have steadily increased through mid-2024, giving officials reason to ease policies. This historical context reinforces the case for lower rates now, benefiting non-yielding gold. With gold reaching new highs, implied volatility is high, making long calls expensive. We might consider using bull call spreads, which involve buying a lower strike call and selling a higher strike call. This method lowers the entry cost and can provide a better risk-reward scenario if the price moves towards $4,300. Despite the strong momentum, we must manage the risk of a sharp pullback from these record levels. The $4,000 level is crucial to watch for changes in market sentiment. To safeguard existing long positions, we can buy out-of-the-money put options, which function as insurance against sudden drops. Create your live VT Markets account and start trading now.

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