Gold prices are increasing, which is leading to more investments in exchange-traded funds (ETFs). However, this rise in price is reducing physical demand. In August, China’s gold imports dropped 3.4% compared to the previous month. Net imports from Hong Kong also saw a significant decline, plummeting 39% to just under 27 tons. Gold dealers are now selling an ounce of gold at discounts ranging from $21 to $36. This is the biggest discount we’ve seen since May 2020. This situation highlights a change in the market: as prices rise, physical demand decreases, while investors are favoring paper gold.

Risks and Uncertainties in Gold Markets

The article includes forward-looking statements that involve risks and uncertainties. It emphasizes that the markets and instruments discussed are for informational purposes only. Readers should conduct their own research before making investment decisions. Any risks or losses, including the total loss of principal, are the responsibility of the reader. The article notes that the author has no holdings in any mentioned stocks and has no business relationships with the companies discussed. FXStreet and the author do not give personalized recommendations or investment advice. They are not responsible for any errors, omissions, or damages that may occur. The gap between paper gold and physical gold markets is becoming more obvious, highlighting a critical market signal. Gold prices have remained high, close to $2,450 throughout September 2025, and strong ETF inflows show investor interest in gold as a hedge against inflation. Data from the World Gold Council earlier this year confirmed a steady rise in ETF holdings since the Federal Reserve began lowering rates. Recent data for August 2025 reveals clear signs of reduced demand in essential physical markets. China’s gold imports fell, and dealers in Shanghai are offering the steepest discounts since early 2020’s economic disruptions. This indicates that consumer demand, particularly from the jewelry industry, a traditional support for gold prices, is weakening under current price conditions. This decline in consumer purchases is being balanced by strong demand from the official sector, a trend that has persisted for nearly two years. The People’s Bank of China has been consistently buying gold, adding over 250 metric tons to its reserves since early 2024 as part of its strategy to reduce reliance on the dollar. This central bank buying establishes a solid foundation for gold prices, though it is not as responsive to short-term price changes as retail demand.

Current Market Dynamics and Trader Strategies

In the derivatives market, current conditions suggest that while lower interest rates provide positive support, the basic demand for physical gold is weak. The U.S. 10-year Treasury yield fell below 3.5% this month, making gold, which does not yield interest, more appealing to institutional funds. However, this situation could change quickly, making long futures positions risky if central bank purchases slow down. Over the next few weeks, traders might want to adopt strategies that leverage the current volatility. Buying call option spreads instead of naked futures can provide upside potential while managing risk if the weak physical market affects prices. This strategy allows traders to benefit from the optimistic outlook due to monetary policy while being cautious of warning signs from the physical trade. Additionally, the widening gap between paper prices and the realities of the physical market may lead to uneven and volatile trading rather than a straightforward trend. This scenario favors strategies that can capitalize on price fluctuations rather than those that follow trends. Selling out-of-the-money puts could be an effective way to collect premiums while betting that central bank purchasing will support prices during any significant declines. Create your live VT Markets account and start trading now.

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