Spot Gold prices have dropped sharply, falling 5.3% in one day and continuing to decline in early Asian trading. This drop comes as traders take profits after a period of increased buying. Since late August, spot Gold has risen dramatically, climbing nearly $1,000 per ounce. However, worries about sustaining this upward trend have emerged, especially after President Trump expressed optimism about a favorable trade deal with China, adding more pressure on prices.

Gold ETF Buying

The recent rise in Gold prices is largely due to significant buying by ETFs. In September, Gold ETF purchases reached record levels in dollar terms, with tonnage buying being the highest since March 2022. Other precious metals have also faced price declines. Silver fell more than 7%, while Platinum and Palladium dropped by 5.2% and 6.1%, respectively. With a notable 5.3% decline in gold yesterday, implied volatility has risen sharply. The Cboe Gold Volatility Index (GVZ) surged over 35%, the highest level since the banking concerns of March 2024. This makes buying options more costly, but it also creates an opportunity for those looking to sell premium. The price drop appears linked to recent strong economic data, which reduces demand for safe-haven assets. The latest Non-Farm Payrolls report showed an unexpected gain of 265,000 jobs, suggesting that fears of an economic slowdown are fading. Traders might consider buying short-dated put options to safeguard against or profit from further sales by ETFs.

Major Gold ETF Outflows

Data has shown over $5 billion has flowed out of major gold ETFs in just two trading days, marking a record pace of selling. This pullback resembles the sharp correction seen in Q2 2023, which was followed by range-bound trading. Selling out-of-the-money call spreads could be a good strategy to take advantage of high volatility and a potentially limited upside in the near future. The sell-off has been even more significant for other precious metals, with silver dropping more than 7%. This has pushed the gold-silver ratio to over 92, a level often indicating that silver is undervalued compared to gold. A pairs trade, going long on silver while shorting gold using futures or options, could be a strategy to capitalize on this potential reversion to the mean. Create your live VT Markets account and start trading now.

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