Insights 
VT 
Gold fell over 3% to below $4,000/oz, following progress in US-China trade talks which reduced its safe-haven demand. Last week, gold reached a record high above $4,380/oz. A potential trade agreement between the countries could ease the geopolitical tensions driving gold’s price up.
The price decline coincided with large outflows from gold-backed ETFs, marking the biggest outflow since May 2025. Despite this correction, gold has risen over 50% this year, buoyed by strong ETF demand and central bank purchasing. Structural factors that drove gold’s rally earlier remain in place.
Central Banks Buying Gold
Central banks are likely to continue buying gold, with the recent price drop offering a chance to expand holdings. This sustained interest in gold purchasing is part of diversification strategies central banks are utilising. These strategies have played an important role in gold’s performance this year.
Yesterday’s sharp drop in gold below $4,000 an ounce has presented us with a complex trading environment. The move was triggered by news of a potential “Phase Four” trade agreement between the US and China, causing a rapid unwinding of safe-haven positions. This has pushed implied volatility higher, creating opportunities for those prepared to trade the swings.
We must pay close attention to the money flow, as data shows that gold-backed ETFs saw net outflows of over 35 tonnes last week. This was the largest weekly outflow recorded by the World Gold Council since the correction we saw back in May 2025. For now, this suggests that shorter-term investors are taking profits off the table and reducing their exposure.
Despite this pullback, we should not forget that gold is still up more than 50% year-to-date, and the reasons for this rally have not disappeared. The latest US Consumer Price Index for September 2025 showed inflation holding stubbornly at 4.1%, well above the Federal Reserve’s target. This underlying inflation continues to provide a strong fundamental support for gold prices over the medium term.
Derivative Trading Strategies
This pattern of strong central bank buying during price dips has historical precedent, reminding us of the record purchases seen back in 2022 and 2023. These institutions view such corrections as strategic opportunities to increase their reserves away from the dollar. We expect central banks, particularly from emerging markets, to be active buyers if the price weakness continues.
Given the uncertain direction but guaranteed volatility, derivative traders should consider strategies that benefit from price movement itself. Buying puts could serve as a good hedge or a speculative bet on a deeper correction towards the $3,850 support level. Conversely, traders who believe this is a temporary dip can look to buy calls on further weakness, targeting a rebound.
A more balanced approach involves using spreads to manage risk in this volatile market. Consider buying call spreads to bet on a recovery, which would cap potential profits but significantly lower the upfront cost compared to buying an outright call. We are watching the $4,000 level closely, as a failure to reclaim it in the coming days could signal more downside.
