Gold Prices Surge Amid Geopolitical Tensions and Rate Cuts
24-09-24
Gold prices have surged by more than 55% in the last 12 months, reflecting both the commodity’s role as a safe-haven asset during times of heightened geopolitical tension, and as a store of wealth when currencies are being debased.
Furthermore, the Federal Reserve Rate cutting cycle which began last Wednesday 18th September marked the first cut in four years. This both reduces the cost of carry for gold and the opportunity cost of foregone interest from other ‘safe’ assets such as US Treasuries.
Also adding support to gold is the US government’s ability to sanction the use of US dollars by entities deemed counter to US interests; as well as to freeze or confiscate assets held in US banks or in US dollars.
It is therefore something of a perfect confluence of events that is driving gold higher: heightened geopolitical risk; currency debasement; a reduced cost of carry and opportunity cost of holding gold; and USD-based sanctions.
In July, 53% of China’s inbound and outbound transactions made use of the Chinese Renminbi, up 40% from the same period in 2021, demonstrating the influence of improved Sino-Russian relations cutting dollar dependency. Many other countries are also looking to move away from the USD, or at least to have an alternative.
In 2024, the World Gold Council has recently covered The Reserve Bank of India’s continued expansion into the physical gold market, with the Asian nation emerging as one of this year’s leading gold buyers having purchased a total of 50 tons over the first eight months of the year, significantly surpassing the net purchases of 2022 and 2023.6
According to RBI data and World Gold Council estimates, the central bank acquired a total of 10.3t of gold over the six weeks leading up to 6 September.5 World Gold Council
The Reserve Bank of India’s gold reserves have now reached a record of 853.6 tons accounting for 9% of its total foreign reserves, up from 7.5% a year ago.
Call Spread
Trade Idea
Call Spread
Gold Spot Price = $2629.14 per oz (as of 23/09/2024)
Buy: 1 (contract) x $49.00 (contract price) x 100 (contract size) = $4900 debit
Sell: 1 (contract) x $34.00 (contract price) x 100 (contract size) = $3400 credit
Total consideration of $1,500 (excl. fees + commissions)
Historically, Gold has risen by >55% since Oct 2023.
A further 4.6% increase on the current spot price to $2750 by 25-Nov-2024 expiry, would yield a 233% return on your initial investment, valuing the call spread at $5000 (2750 – 2700 x 100), yielding a maximum profit of $3500 ($5000 – $1500) (excl. fees + commissions)
Maximum loss $1,500 (excl. fees + commissions)
Defined risk profile, maximum loss is equal to the net option premium paid.
Lower initial outlay in exchange for a capped maximum profit.
Breakeven if underlying Gold spot price = $2715 @ Expiry 25-Nov-2024 (strike price + net premium paid)
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