Gold’s breakout is gaining momentum as Chinese and central-bank buying, recovering Western demand, bullish CTA positioning, Treasury-driven dollar pressure and an options squeeze combine to threaten Goldman’s $4,900 forecast.
TL;DR
- Gold’s breakout is becoming broader and more self-reinforcing.
- Options could turn the rally into a squeeze.
- The macro headwind is fading.
- Positioning still has room to grow.
Gold Breakout Gains Momentum as Options, China and Treasury-Shift Align
Authored by GoldFix
Goldman put out three notes on Gold in the past 24 hours (ht ZH). In this message we analyze two of them.
Gold surged this week, extending a breakout that was already developing before Treasury Secretary Scott Bessent announced a more active approach to bond buybacks and issuance composition. The metal has moved decisively back above its 200-day moving average after first breaking through recent resistance on strong buying from China, central banks and ETF investors.
The Treasury announcement merely added another catalyst as markets believe a more active effort to stabilize the long end of Bonds will ultimately place greater pressure on the dollar (it will), while institutional investors and systematic strategies began rebuilding gold exposure.
Options Squeeze for Exotic Shorts
The Bank argues one of the most important developments is the sharp increase in demand for gold calls as investors seek protection against broader macroeconomic and policy risks. The significance extends beyond the options market itself because dealers that sold calls will have to purchase additional gold as prices approach important strike levels, creating a feedback mechanism that can strengthen an already rising market.
“Gold call option demand has risen sharply amid renewed demand for global macro-policy hedges, creating a mechanical price amplifier to both the upside and downside.”
Dealers Will Squeeze Themselves Both Ways
As gold rises toward strikes with large open interst, dealers will be forced to increase hedges by buying more exposure (sometimes with gold itself, sometimes with vanilla options) , potentially accelerating the rally. The same process can work in reverse if prices decline, since dealers can unwind those hedges and add selling pressure. This is what happened earlier in the year when options position exaggerated alternate upside and downside moves in short order. Elevated options positioning therefore increases the potential size of moves in both directions, although the current increase in call demand has been reinforcing the advance.
The move has coincided with a roughly 15% increase in gold from its mid-July low to over $4,600 an ounce. Goldman believes rising call demand has likely amplified that recovery, particularly as conventional investment demand has also begun to improve.