Gold prices reached a new all-time high near $4,240, driven by speculations of the Federal Reserve cutting interest rates by 50 basis points. Increasing US-China trade tensions have also boosted demand for safe-haven assets like gold.

Traders expect the Fed to loosen monetary policies due to concerns over the US labour market. More than 94% believe the Fed will reduce interest rates to 3.50%-3.75% by year-end. Lower interest rates typically benefit non-yielding assets, such as gold.

Geopolitical Tensions and Gold

Geopolitical tensions, including US-China trade frictions, further support gold’s rally. President Trump’s announcement of additional tariffs on China escalates demand for secure investments.

Technically, the gold price hit $4,246, with a bullish trend supported by the 20-day Exponential Moving Average around $3,950.15. The Relative Strength Index indicates strong momentum, forecasting potential rises towards $4,300. Conversely, $4,000 serves as significant support.

Gold is a traditional store of value, often used as a hedge against inflation and currency devaluation. Central banks, primarily from emerging economies like China, India, and Turkey, have increased gold reserves significantly. Gold’s value is inversely correlated to the US Dollar and US Treasuries, with its price influenced by geopolitical events and interest rates.

Given the powerful rally to new all-time highs, we should maintain a clear bullish stance on gold. The combination of expected Fed rate cuts and geopolitical tensions creates a strong tailwind for the price. Derivative strategies should focus on capturing further upside, such as buying call options or taking long positions in gold futures for the coming months.

Central Banks and Long Term Trends

The demand for gold as a safe-haven asset is part of a long-term trend we have been observing. Central banks continue to be significant buyers, providing a solid floor for the price. This behavior is consistent with the pattern we saw back in 2023, when central banks collectively bought 1,037 tonnes of gold, marking the second-highest year of purchases on record.

The market’s confidence in a 50-basis-point rate cut is an acceleration of the dovish pivot we first witnessed from the Fed in late 2023. Concerns about the labor market are not new; we saw jobless claims begin a slow but steady increase through mid-2024, giving officials the justification to start easing policy. This historical context strengthens the case for lower rates now, which is highly supportive for non-yielding gold.

With gold making new highs, implied volatility is likely elevated, making outright long calls expensive. We should consider using bull call spreads, which involve buying a call at a lower strike price and selling one at a higher strike. This approach reduces the initial cost of entry and can offer a better risk-reward profile if the price continues its steady grind towards the $4,300 level.

Despite the strong momentum, we must manage the risk of a sharp pullback from these record levels. We should use the $4,000 psychological level as a key area to monitor for potential shifts in sentiment. To protect existing long positions, we can purchase out-of-the-money put options, which act as an insurance policy against any sudden negative shocks.

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