Gold prices dropped more than 3%, falling below $4,000 per ounce. This decline came after positive news about US-China trade talks, which reduced the demand for gold as a safe investment. Last week, gold had hit a record high of over $4,380 per ounce. If a trade agreement is reached, it could lessen the geopolitical tensions that are pushing gold prices higher. The price drop happened alongside significant outflows from gold-backed ETFs, marking the largest withdrawal since May 2025. Even with this recent correction, gold prices have surged over 50% this year, driven by strong demand from ETFs and central bank buying. The underlying reasons for gold’s rise remain intact.

Central Banks Buying Gold

Central banks are expected to keep buying gold, especially with recent price drops providing a chance to increase their holdings. This ongoing interest is part of their strategy to diversify investments, which has been key to gold’s strong performance this year. The recent decline in gold below $4,000 creates a complicated trading landscape. This shift was triggered by news of a potential “Phase Four” trade deal between the US and China, leading many to exit safe-haven positions quickly. As a result, implied volatility has increased, opening up opportunities for traders willing to capitalize on price fluctuations. It’s crucial to monitor money flows, as data reveals that gold-backed ETFs experienced net outflows of over 35 tonnes last week—the largest weekly outflow reported by the World Gold Council since the correction in May 2025. This suggests that short-term investors are cashing out and reducing their positions. However, it’s important to note that gold remains up more than 50% this year. The reasons behind this rally still hold true. The latest US Consumer Price Index for September 2025 shows stubborn inflation at 4.1%, well above the Federal Reserve’s target. This persistent inflation continues to support gold prices in the medium term.

Derivative Trading Strategies

The trend of strong central bank buying during price dips has happened before, as seen with record purchases in 2022 and 2023. These institutions view price corrections as chances to boost their reserves, moving away from the dollar. We anticipate that central banks, especially in emerging markets, will be active buyers if prices remain weak. In this uncertain but likely volatile market, derivative traders should think about strategies that take advantage of price movements. Buying puts could serve as a protective measure or a speculative play if there’s a deeper correction towards the $3,850 support level. On the other hand, traders who think this dip is temporary might look to buy calls on any further decline, aiming for a rebound. A balanced approach could involve using spreads to manage risk in this volatile market. Consider buying call spreads to invest in a recovery. This method caps potential profits but also reduces the upfront costs compared to purchasing a straight call. We’re closely watching the $4,000 level—if it fails to be reclaimed in the coming days, it could indicate more downside ahead. Create your live VT Markets account and start trading now.

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