The People’s Bank of China has added to its gold reserves for the tenth month in a row in August. It increased its holdings by 0.06 million troy ounces, totaling 74.02 million ounces since it began buying again last November. Gold prices have soared over 30% this year, now exceeding $3,500 per ounce. Key reasons for this rise include expectations of US interest rate cuts and concerns about political influences on the Federal Reserve.

Impact of Federal Reserve Independence

Goldman Sachs warns that threats to the Federal Reserve’s independence could drive gold prices up to $5,000. Although global central banks are buying less gold due to rising prices, the World Gold Council believes that geopolitical risks will keep demand strong. With gold stable above $3,500 an ounce, the ongoing purchases by the People’s Bank of China signal strong and consistent demand. The trend of de-dollarization has been important since the dollar was used as a weapon in 2022, providing support for gold prices. Central banks bought a net total of 800 tonnes in 2024, continuing a multi-year trend that supports a bullish outlook. The main reason for gold’s 30% price increase this year is the market’s expectation of US interest rate cuts. Historically, gold has performed well when the Federal Reserve lowers rates, as seen in 2019. Any hints of political interference with the Fed will likely boost this positive sentiment. Traders may want to consider positioning themselves for further gains, but they should be cautious given the current high prices. Buying long-dated call options on gold futures or exchange-traded funds can be a good way to benefit from a potential rise to $5,000 while limiting risk to the premium paid. Given the increased volatility, using call spreads can help lower the entry cost.

Global Central Bank Buying Trends

It is important to note that while global central bank buying remains steady, it has slowed at these higher prices. The upcoming US inflation data and Federal Reserve meeting later this month are critical turning points. A surprising inflation report or a cautious statement from the Fed could lead to a sharp, temporary decline in prices. This environment may be suitable for “buy the dip” strategies, as geopolitical risks remain high, keeping safe-haven demand strong. We can look at the derivatives market for guidance, observing that open interest in call options with strike prices above $3,800 has increased by over 15% in the past month. Traders should pay attention to any unwinding of these positions, which could indicate a loss of confidence. Create your live VT Markets account and start trading now.

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