Impact of US-China Trade Developments

Recent positive developments in US-China trade are affecting how people view risks, which could lower the demand for gold as a safe investment. The Federal Reserve has recently reduced its benchmark overnight borrowing rate to a range of 3.75%-4.0%. Many in the market expect another rate cut soon, with a 63% chance predicted for December. Global demand for gold greatly influences its price, and central banks are major holders. In 2022, central banks added 1,136 tonnes of gold, worth about $70 billion, to their reserves. Emerging economies, especially China, India, and Turkey, are rapidly increasing their gold reserves. Gold’s price often moves opposite to the US Dollar and US Treasuries, two important reserve assets. Many factors affect the price of gold, such as geopolitical tensions and economic conditions. Typically, gold’s price is managed by the dollar’s performance, as it is sold in dollars. Gold has recently fallen to around $3,965, so we should expect prices to decline. The easing US-China trade tensions and the Federal Reserve suggesting they may pause interest rate cuts remove two key supports for gold. We see this as a chance to prepare for further declines in the coming weeks. Currently, the market is pricing a 63% chance of a rate cut in December, but we think that’s too high given what the Fed has said. We need to closely monitor the upcoming inflation data for October. If core inflation stays above 3.5%, as it has recently, the likelihood of a rate cut in December will likely decrease, which would strengthen the US dollar and push gold prices lower.

Market Strategies and Predictions

Although the news about tariffs being reduced on Chinese goods seems negative for gold, we should remember how fragile these agreements can be. The “Phase One” deal from 2020 had mixed results. This current truce could be short-lived, meaning that a quick market rally based on this news might not last. Right now, the trend for gold seems to be downward as demand for safe investments decreases. For a direct bearish strategy, we should consider buying put options. Since gold has dropped below the critical $4,000 level, buying December puts with a strike price around $3,900 could work well. This would benefit from further declines influenced by a hawkish Fed and increased risk appetite. For a more cautious approach that gains from sideways or falling prices, we can look at selling call credit spreads. Setting up a spread with strike prices above the $4,000 mark would allow us to collect a premium. This strategy will be profitable as long as gold does not experience a significant increase in the next few weeks. We should also keep an eye on today’s US ISM Manufacturing PMI release. A weaker-than-expected result could support a temporary rise in gold prices by putting pressure on the dollar. The October ISM data from 2024 was reported at 49.2, so a reading below that could provide a good opportunity to start new short positions. Create your live VT Markets account and start trading now.

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