Gold’s bull market has been linked to successive sources of demand, starting with central banks and later extending to institutional and retail buying. The pattern has been described as mechanically similar to a carry trade, with US dollar surpluses being recycled into gold. Middle Eastern US dollar surpluses are now under pressure from higher energy costs and the Iran conflict. Energy-importing countries may find it harder to keep directing US dollars into gold because more cash is being used to pay for elevated energy prices.

Medium Term Outlook For Gold

Gold’s long-term outlook is described as healthy, while the medium-term is described as constrained by the conflict. The recent drawdown in gold is described as extreme, but the near-term outlook is still described as vulnerable. A Supreme Court decision on the Lisa Cook trial is cited as a near-term risk event. A large fall over the coming week could lead Commodity Trading Advisors (CTAs) to exit remaining gold long positions, potentially leaving them flat for the first time in more than two years. We have seen how USD surpluses from energy-producing nations, particularly in the Middle East, fueled the gold rally throughout 2025. That capital flow is now reversing as the ongoing conflict with Iran keeps Brent crude trading stubbornly above $125 a barrel, its highest price since the 2022 energy crisis. This dynamic pressures those nations’ budgets, forcing them to spend dollars on domestic needs rather than accumulating gold. The key risk for derivative traders in the coming weeks is a mass exit by Commodity Trading Advisors (CTAs). Our models show these trend-following funds are still holding significant long positions that they first established back in early 2024. A sharp price drop below the critical $2,650 per ounce support level could trigger their automated selling programs and wash out this long-standing support.

Downside Protection Strategy

Given this setup, purchasing short-term downside protection through put options seems like a prudent strategy. Implied volatility on gold options has already ticked up to a six-month high of 18%, reflecting deep market uncertainty ahead of the Supreme Court’s upcoming decision on the Lisa Cook trial. This indicates the market is already bracing for a potentially large price swing. This gold trade has essentially acted like a carry trade, attracting a cascade of capital from central banks to retail buyers who followed the initial momentum. As the original source of funds dries up, the entire structure becomes fragile. The latest data showing a 15% quarter-over-quarter drop in GCC foreign exchange reserves confirms this capital recycling trend is already unwinding. While the long-term outlook for gold remains healthy due to structural demand, the medium-term path is clearly challenged. The immediate focus should be on the risk of this large pool of CTA capital exiting the market. A completely flat position would remove a major pillar of price support that we have become accustomed to for more than two years. Create your live VT Markets account and start trading now.

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