Yellow metal prices have soared. It has been setting several new all-time highs with futures trading just shy of the USD 3,000/oz level. However, gold has struggled to breach past the crucial mark despite multiple attempts.
Some data points suggest that the rally in gold might be losing steam even though fundamental demand drivers remain intact.
A nuanced position is required at times like this. Options are tailored to help portfolio managers to position shrewdly in such dicey situations.
GEOPOLITICAL RISK IS PERSISTENTLY ELEVATED IN THE NEW WORLD ORDER
The Geopolitical Risk Index (GPR) remains above one hundred since 2022 which reflects sustained global uncertainty driven by ongoing geopolitical tensions. This trend has persisted for years, with recent tariff-related uncertainty adding fuel to this fire.
Gold, as a safe haven asset, benefits from these conditions. However, the recent bond selloff has driven Treasury rates higher which could potentially reduce demand for gold as it is a non-yielding asset.
CENTRAL BANKS ARE LOADING ON RISING GLOBAL TRADE UNCERTAINTIES
Central banks are resuming gold purchases, with January showing an uptick, albeit below the 2024 average. The accelerating pace could signal further momentum, particularly amid rising global trade uncertainty.
China resumed gold buying in November 2024 following a six-month hiatus. China was one of the largest buyers in 2023 and a repeat of that in 2025 will see a sharp demand spike.
LARGE GOLD FLOWS INTO THE US
The large financial institutions which serve as counterparties in the futures market have been importing significant quantities of physical gold to the US. The recent flows have surpassed levels seen during COVID pandemic.
Physical imports have been driven by fears of a tariff on gold imports. However, the pace of imports has slowed down and is starting to plateau.
Looking back at 2020, when similar conditions arose, prices remained stagnant after the sharp rally driven by physical gold imports. The risk of a repeating pattern is even more potent given the strong resistance at the USD 3,000/oz level. A strong driver may be required to allow prices to cross this threshold.
Another factor contributing to the temporary physical supply shock is the refining process required before gold reaches the U.S.
The physical gold reserves held in London for Good Delivery are the 400-oz bars, which must be refined into 1-kilo bars for CME delivery. This process requires an intermediate stop in Switzerland, adding delays that exacerbate supply constraints.
However, as the additional refined metals reach the U.S. in the coming weeks, supply is expected to normalize, potentially putting downward pressure on prices.
Other supply stress indicators are easing. Gold leasing rates, which reflect the cost of borrowing for physical use, recently surged above 5%, with near-term borrowing costs rising sharply. Leasing rates have returned to normal, albeit slightly elevated.
TECHNICAL SIGNALS POINT TO STRONG MOMENTUM ENCOUNTERING RESISTANCE
The summary below suggests a bullish stance in gold but prices are encountering resistance. Over the past month, prices have faced strong resistance at the USD 3,000 level despite a strongly bullish sentiment.
The resistance formed after a stunning rally which pushed gold into overbought territory, a correction at this stage is expected.
Should momentum fade, gold prices may continue to consolidate between present levels and the 100-day moving average.
Gold futures prices formed a death-cross on 5th March 2025 which may fuel a near term price correction.
GOLD VOLATILITY IS NOT LOW BUT CAN RISE HIGHER IF CONDITIONS TURNS TENSE
Gold Volatility as measured by CME’s Gold CVol printed a high of 50.13 on 18th March 2020 and a low of 8.18 on 3rd May 2019.
Presently hovering at 16.35, the implied volatility in gold is not too low but below average with the potential to spike higher should geopolitical or other shocks rock the market.
HYPOTHETICAL TRADE SETUP
Fundamentals remain intact and could intensify if tariff and/or geopolitical tensions peak. That said, the phenomenal gold rally is starting to lose shine as it encounters strong resistance with death cross forming on 5th March 2025.
Supply shocks that fueled the rally in Feb are now fading.
Equity risks are elevated with expensive S&P 500 P/E multiples. Geopolitical and trade risk remain tense. These conditions support a further bullish position in gold.
With prices expected to swing either way, portfolio managers are best positioned to have a convex position that gains from sharp moves in either direction.
To express this ambivalent view on the path ahead for gold prices, portfolio managers can utilize CME Micro Gold Options to establish a long straddle (combination of long put & long call) that gains from (a) deep pull back in prices (puts gain in value), or (b) sharp rally (calls deliver the gains), and (c) implied volatility expansion (where both puts & calls gain in value).
Conversely, this trade will incur losses if prices remain flat and if volatility shrinks.
The pay-off of the hypothetical long straddle set up using CME Micro Gold Options June 2025 contract expiring on 27th May 2025 is illustrated below.
The long call at a strike of 2,945 will cost USD 84.9 per lot and the long put at the same strike will cost USD 86.9 per lot adding up to USD 171.80 per lot in total premiums. The long straddle will generate positive returns at expiry if the underlying futures prices are (a) above the upper break even point of USD 3,116.80/oz, or (b) below the lower break even point of USD 2,732.20/oz.
If the underlying futures prices stay within the break-even points, this straddle is exposed to a maximum loss of USD 171.80/lot representing the total premium. Happy Investing.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Some data points suggest that the rally in gold might be losing steam even though fundamental demand drivers remain intact.
A nuanced position is required at times like this. Options are tailored to help portfolio managers to position shrewdly in such dicey situations.
GEOPOLITICAL RISK IS PERSISTENTLY ELEVATED IN THE NEW WORLD ORDER
The Geopolitical Risk Index (GPR) remains above one hundred since 2022 which reflects sustained global uncertainty driven by ongoing geopolitical tensions. This trend has persisted for years, with recent tariff-related uncertainty adding fuel to this fire.
Data Source: Economic Policy Uncertainty
Gold, as a safe haven asset, benefits from these conditions. However, the recent bond selloff has driven Treasury rates higher which could potentially reduce demand for gold as it is a non-yielding asset.
CENTRAL BANKS ARE LOADING ON RISING GLOBAL TRADE UNCERTAINTIES
Central banks are resuming gold purchases, with January showing an uptick, albeit below the 2024 average. The accelerating pace could signal further momentum, particularly amid rising global trade uncertainty.
Data Source: WGC
China resumed gold buying in November 2024 following a six-month hiatus. China was one of the largest buyers in 2023 and a repeat of that in 2025 will see a sharp demand spike.
LARGE GOLD FLOWS INTO THE US
The large financial institutions which serve as counterparties in the futures market have been importing significant quantities of physical gold to the US. The recent flows have surpassed levels seen during COVID pandemic.
Physical imports have been driven by fears of a tariff on gold imports. However, the pace of imports has slowed down and is starting to plateau.
Looking back at 2020, when similar conditions arose, prices remained stagnant after the sharp rally driven by physical gold imports. The risk of a repeating pattern is even more potent given the strong resistance at the USD 3,000/oz level. A strong driver may be required to allow prices to cross this threshold.
Chart Source: WGC
Another factor contributing to the temporary physical supply shock is the refining process required before gold reaches the U.S.
The physical gold reserves held in London for Good Delivery are the 400-oz bars, which must be refined into 1-kilo bars for CME delivery. This process requires an intermediate stop in Switzerland, adding delays that exacerbate supply constraints.
However, as the additional refined metals reach the U.S. in the coming weeks, supply is expected to normalize, potentially putting downward pressure on prices.
Chart Source: WGC
Other supply stress indicators are easing. Gold leasing rates, which reflect the cost of borrowing for physical use, recently surged above 5%, with near-term borrowing costs rising sharply. Leasing rates have returned to normal, albeit slightly elevated.
TECHNICAL SIGNALS POINT TO STRONG MOMENTUM ENCOUNTERING RESISTANCE
The summary below suggests a bullish stance in gold but prices are encountering resistance. Over the past month, prices have faced strong resistance at the USD 3,000 level despite a strongly bullish sentiment.
The resistance formed after a stunning rally which pushed gold into overbought territory, a correction at this stage is expected.
Should momentum fade, gold prices may continue to consolidate between present levels and the 100-day moving average.
Gold futures prices formed a death-cross on 5th March 2025 which may fuel a near term price correction.
GOLD VOLATILITY IS NOT LOW BUT CAN RISE HIGHER IF CONDITIONS TURNS TENSE
Gold Volatility as measured by CME’s Gold CVol printed a high of 50.13 on 18th March 2020 and a low of 8.18 on 3rd May 2019.
Presently hovering at 16.35, the implied volatility in gold is not too low but below average with the potential to spike higher should geopolitical or other shocks rock the market.
Source: CME CVol
HYPOTHETICAL TRADE SETUP
Fundamentals remain intact and could intensify if tariff and/or geopolitical tensions peak. That said, the phenomenal gold rally is starting to lose shine as it encounters strong resistance with death cross forming on 5th March 2025.
Supply shocks that fueled the rally in Feb are now fading.
Equity risks are elevated with expensive S&P 500 P/E multiples. Geopolitical and trade risk remain tense. These conditions support a further bullish position in gold.
With prices expected to swing either way, portfolio managers are best positioned to have a convex position that gains from sharp moves in either direction.
To express this ambivalent view on the path ahead for gold prices, portfolio managers can utilize CME Micro Gold Options to establish a long straddle (combination of long put & long call) that gains from (a) deep pull back in prices (puts gain in value), or (b) sharp rally (calls deliver the gains), and (c) implied volatility expansion (where both puts & calls gain in value).
Conversely, this trade will incur losses if prices remain flat and if volatility shrinks.
The pay-off of the hypothetical long straddle set up using CME Micro Gold Options June 2025 contract expiring on 27th May 2025 is illustrated below.
The long call at a strike of 2,945 will cost USD 84.9 per lot and the long put at the same strike will cost USD 86.9 per lot adding up to USD 171.80 per lot in total premiums. The long straddle will generate positive returns at expiry if the underlying futures prices are (a) above the upper break even point of USD 3,116.80/oz, or (b) below the lower break even point of USD 2,732.20/oz.
Source: QuikStrike Strategy Simulator
If the underlying futures prices stay within the break-even points, this straddle is exposed to a maximum loss of USD 171.80/lot representing the total premium. Happy Investing.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Full Disclaimer - linktr.ee/mintfinance
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.