Gold could top Goldman’s $4,900 forecast as options demand fuels rally

Gold prices could climb above Goldman Sachs’s $4,900 year-end forecast as rising demand for bullish options potentially magnifies further gains, the bank said in a note on Friday, Reuters reported.

Goldman said stronger demand from Western investors, together with continued robust central bank purchases, could lift bullion toward important option strike prices. At those levels, dealer hedging could automatically accelerate market moves.

"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," Goldman said in the statement, according to Reuters report.


The options effect can work in either direction. As gold approaches key strike prices, dealers that sold call options may need to purchase bullion to hedge their exposure, adding momentum to the rally.

However, Goldman warned that the opposite is also true. A decline in prices could prompt dealers to unwind their hedges, intensifying a sell-off.

The bank attributed gold’s advance toward $4,600 an ounce to fading expectations of a September US Federal Reserve rate hike following the Fed’s decision to hold policy steady in July and the release of softer employment and inflation data.

Goldman said those developments had revived speculative positioning on COMEX and strengthened demand for exchange-traded funds.

"Renewed increase in Fed-hike expectations could likewise trigger dealer hedge unwinds and produce a sharper-than-usual correction," the note added further.

Spot gold was heading for a third consecutive weekly gain, rising nearly 5% over the week. It reached a more than three-month high and moved above its 200-day moving average.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)