Gold (XAU/USD) soared to a record high of $4,906, increasing by 1.60% on the day and trading at $4,903. This rise came amid improved risk sentiment and reduced tensions between the US and Europe following an agreement about Greenland. The gold rally is supported by ongoing policy uncertainty and lowered expectations. Talks between US President Donald Trump and NATO’s Mark Rutte in Switzerland resulted in the cancellation of tariff threats on eight European countries.

US Economic Outlook

US economic data has been better than expected, with third-quarter GDP surpassing projections. While the Federal Reserve’s inflation gauge stabilized, it remains below 2%. Despite the positive US economic news, money markets predict a 41 basis point easing by year-end. US Treasury yields are steady, and the Dollar Index dropped 0.47% to 98.32. Gold is targeting $5,000 but may face a downside if it falls below $4,850. Central banks have significantly increased their gold holdings, purchasing 1,136 tonnes in 2022 alone. Countries like China, India, and Turkey are building up their reserves. Gold often rises during geopolitical tensions or when interest rates decrease, usually moving opposite to the US Dollar and Treasuries. Gold’s rise above $4,900 is unusual, especially given the strong US economic data from late last year. The price surge is mainly driven by a weakening US Dollar and ongoing expectations for Federal Reserve rate cuts in 2026. This creates a challenging situation where the trend appears strong, but the underlying factors seem uncertain.

Central Bank Activity

The demand for gold isn’t purely speculative; strong institutional buying is supporting its price. According to the World Gold Council, central banks bought another 250 tonnes in the fourth quarter of 2025, continuing a multi-year accumulation trend. Additionally, gold-backed ETF inflows in early January have already exceeded those of the entire previous quarter, signaling increased interest. With the Relative Strength Index (RSI) now in overbought territory, simply buying futures may be risky due to the possibility of a sharp pullback. Traders might consider using options, like a bull call spread for March contracts, to benefit from a continued move toward the psychological $5,000 level while limiting their risk. This approach is more cost-efficient than outright call purchases, especially during high volatility. For those already holding long positions, it’s crucial to safeguard gains against a potential reversal. Buying protective puts with a strike price around $4,800 can serve as insurance against sudden drops. A similar sharp correction occurred after a significant milestone was reached in mid-2024, reminding us that record highs can be volatile. The Federal Reserve is a key player in this scenario. The market anticipates rate cuts, despite officials’ comments about the January meeting. Traders are overlooking the Fed’s current stance, predicting weaker data later this year. Any subtle change in the Fed’s language next week could lead to drastic price movements, highlighting the importance of careful risk management. Create your live VT Markets account and start trading now.

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