Gold (XAU/USD) ticked up towards $4,500 in early Asian trading on Friday, recovering from a two-month low after reports that the US and Iran had reached a tentative agreement to extend a ceasefire. Bloomberg said the proposal would add 60 days to the truce and open further talks on Iran’s nuclear programme, fuelling expectations that the three-month conflict could move towards a resolution. US President Donald Trump has yet to accept the terms, and the extension remains unconfirmed.
In the US data, the BEA said the PCE Price Index rose 3.8% year on year in April, up from 3.5% previously and matching expectations. Core PCE increased to 3.3% from 3.2%, also in line with forecasts, while on a monthly basis headline PCE rose 0.4% and core PCE gained 0.2%. Separately, central banks added 1,136 tonnes of gold worth about $70 billion to reserves in 2022, according to the World Gold Council, the largest annual purchase since records began. Gold is typically inversely correlated with the US Dollar and US Treasuries, and can act as a hedge against inflation and currency depreciation.
Geopolitical Developments and Inflation Support a Shift in Gold’s Risk Premium
We believe the tentative ceasefire agreement between the US and Iran is a pivotal moment for gold. This news directly reduces the geopolitical risk premium that has supported prices near $4,500. While the deal is not yet final, it signals a significant de-escalation that caps the immediate upside for safe-haven assets.
The latest inflation figures, with the PCE index at 3.8%, show that price pressures remain persistent. However, this was in line with expectations and is not severe enough to force a more aggressive monetary policy stance. Historically, we have seen that central bank actions to fight inflation with higher real interest rates ultimately become a strong headwind for non-yielding gold.
Despite this, we recognize a strong floor for the gold price due to immense structural buying from global central banks. The World Gold Council has consistently reported massive purchases, with over 1,000 tonnes added to official reserves in a single year recently, marking the highest level in over 50 years. This underlying demand should prevent a price collapse but won’t stop a correction based on easing geopolitical tensions.
Speculative Positioning and Strategic Outlook
Recent positioning data from the Commodity Futures Trading Commission (CFTC) shows that hedge funds and other large speculators hold an exceptionally large net long position in gold futures. This crowded trade is highly vulnerable to a reversal on good news, such as a lasting peace deal. We anticipate a sharp unwind of these positions could accelerate any downward price movement in the near term.
Therefore, our strategy in the coming weeks is to sell out-of-the-money call options. This approach allows us to collect premium, capitalizing on the view that gold’s upside is now limited. It is a trade that profits if the price moves sideways or drifts lower as the risk premium erodes and benefits from an expected decline in implied volatility.
