Geopolitical Tensions and Gold Prices

Gold prices jumped over 1.5% on Monday as tensions rose between the US and EU due to tariff threats involving Greenland. This uncertainty helped gold stay close to $4,700, even after a slight dip on Friday. The US Dollar dropped as safe-haven assets like gold and the Japanese Yen gained strength during thin trading on a US holiday. US President Donald Trump announced 10% tariffs on eight European countries, starting February 1. This news led to a significant drop in the US Dollar. In response, EU countries decided to hold off on ratifying an earlier trade agreement. Traders are now predicting a 45 basis point rate cut by the Federal Reserve by the end of 2026. The US could face counter-tariffs from the EU worth up to €93 billion on American goods. In other news, Kevin Hassett pulled out of the running for the Fed Chair position. Gold prices reached a near-record high of $4,700 due to these geopolitical issues. The Relative Strength Index shows that buying momentum might be slowing down. If gold goes beyond $4,700, it could test resistance levels at $4,750 and $4,800, edging toward the $5,000 mark. Central banks boosted their gold reserves by 1,136 tonnes valued at $70 billion in 2022, making it the biggest annual purchase yet. Gold prices are affected by geopolitical instability, the US Dollar’s strength, and interest rates. With gold hitting new highs near $4,700, there is a significant movement toward safe investments driven by geopolitical fears. Traders should consider using options to handle this volatility and seize potential gains. Long call options on gold futures, especially aiming for a $4,800 strike price for March, can provide a clear way to benefit from escalating trade tensions.

Parallels to the US-China Trade Dispute

This situation bears resemblance to the US-China trade conflict from the late 2010s, which sparked a prolonged gold rally. Data from the CME Group indicates that open interest in gold call options has surged nearly 25% in the past week, showing strong bullish sentiment. This momentum appears to be supported by institutional investors and may continue. The recent drop in the US Dollar Index plays a pivotal role in driving up gold prices, and we expect this trend to persist. It might be wise to purchase put options on dollar-tracking ETFs to hedge against or speculate on further dollar weakness. Market expectations of 45 basis points in Fed rate cuts this year also tend to put pressure on the dollar. This week’s Core PCE data and next week’s Fed meeting are key events that could lead to a sharp market reversal if inflation remains high. To prepare for this possibility, utilizing strategies like a long straddle on major indices could be profitable, as they benefit from significant price fluctuations in either direction. With the CBOE Volatility Index (VIX) rising above 20 last Friday, buying VIX calls is another direct way to bet on increasing market anxiety. Despite the positive market mood, we should be aware of the bearish divergence forming on the Relative Strength Index. This suggests the rally might be losing momentum, making it wise to safeguard any existing long positions. Purchasing put options with a strike near the $4,536 support level could be an affordable way to protect portfolios against a sudden market dip. Create your live VT Markets account and start trading now.

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