The following report serves as a follow-up and supplement to the July 6 analysis, "Precious Metals: A Review of Three Key Themes for Q3 Pricing." In that earlier report, we argued that precious metals prices in the third quarter would continue to be driven by three core themes: monetary policy expectations, real interest rates and the strength of the U.S. dollar, and risk premiums. However, the influence and direction of these factors on the market were expected to reverse significantly compared to the second quarter. This does not mean a straightforward upward trend for the third quarter, but rather a transition from a phase of "pricing in the worst-case scenario" to a period of "waiting for new catalysts to confirm the next move." In other words, the worst may be over, but full recovery is not yet here.
As we now stand, more than half of the third quarter has passed. After a period of repeated bottoming in July, gold prices began to rise in early August, confirming our earlier judgment that "the worst was over." We maintain our base-case view of a range-bound market for the third quarter. With current prices trading near the upper end of this range, the remainder of the quarter is more likely to see high-level consolidation or periodic pullbacks. The conditions for a trend breakout are not yet fully in place, so we retain our assessment that "full recovery is not yet here."
Market Review: The Worst Was Over = Bottom Confirmed
Deep correction in Q2: Gold prices fell from their highs, primarily due to the dual pressure of rising U.S. bond yields and a stronger U.S. dollar, driven by a "rate hike trade" narrative.
Bottoming in July: Gold prices repeatedly found support. Gold mining stocks led the rally, signaling price stabilization and a marginal increase in forward price expectations.
Outlook: Full Recovery Not Yet Here = Right Side Not Yet Confirmed
Long-term trend remains intact: Central bank gold purchases and de-dollarization, fiscal deficits and debt expansion, and diminishing marginal pressure from rate hike expectations are three key pillars supporting a higher gold price floor. Short-term pressure remains: Shanghai gold is expected to face pressure. Interest rate expectations will likely remain volatile ahead of the September FOMC meeting (September 15-16). Key focus will be on the policy direction set at the late-August global central bank symposium.
Strategy: Four Expressions of Volatility, Rhythm, Direction, and Basis
① Sell strangle options; ② Accumulator options; ③ Go long on the domestic/foreign price ratio; ④ Go long on the domestic/foreign price ratio.
Market Review: The Worst Was Over = Bottom Confirmed
Deep Correction in Q2: Rate Hike Trade Dominated Pricing
Since late February, the Iran-U.S. conflict pushed up oil prices, and resilient U.S. economic data led the market to shift into a "rate hike trade." The 10-year U.S. Treasury yield rose from 97% in late February to 4.75% in late July. The U.S. Dollar Index climbed from a January low of 95.8 to around 101.2 by the end of June. The rise in real interest rates consistently pressured the non-yielding asset, gold. Gold prices fell from their January 29 high of 1,269.17 yuan per gram (London spot gold at $5,405 per ounce), with Shanghai gold hitting a low of 835.25 yuan per gram on June 30 (London spot gold at $3,993 per ounce on July 16), representing a maximum drawdown of approximately 34%. The exodus of speculative capital further amplified short-term volatility.
Bottoming in July: Gold Found Support
Gold prices repeatedly found support in the range of 870-880 yuan per gram (near $4,000 per ounce in London). Gold mining stocks led the rally, signaling price stabilization and a marginal increase in forward price expectations. (See the July 28 report, "Gold: Divergence Between Stocks and Futures.")
Outlook: Long-Term Uptrend Unchanged, Three Pillars Still Solid
From a long-term perspective, gold's upward trend remains intact, supported by three core pillars. First, central bank gold purchases and de-dollarization constitute a structural source of buying. Against the backdrop of reserve diversification, central banks in emerging markets continue to strategically increase their gold holdings. This demand is decoupled from interest rates and speculative sentiment, providing a stable and sustained floor for gold prices. Second, fiscal deficits and debt expansion weaken the U.S. dollar's creditworthiness, which in turn benefits hard assets. U.S. fiscal deficits and military spending are pushing up the government debt level. Over the long term, the risk of monetary credit dilution and purchasing power decline increases, re-emphasizing gold's monetary properties and store-of-value function. Third, the marginal pressure from interest rate hike expectations is diminishing. The market has largely priced in approximately 30 basis points of rate hikes, leaving limited room for further speculation. As the window for rate cut expectations potentially reopens, the pressure on gold prices from the interest rate front will gradually give way to expectations of policy easing. Taken together, these three pillars support a higher gold price floor, and the long-term upward trend is expected to continue. On the market level, speculative long positions have been largely flushed out, and the $4,000 level has been tested multiple times. The conditions are now in place for establishing structural long positions, but the timing still requires further confirmation of a right-side signal.
Outlook: Technical Support is Solid, Right-Side Signal is Preliminary
Daily Chart Right-Side Confirmation: Bullish Characteristics Are Gradually Emerging
Since August, gold prices have reclaimed the $4,300 level, breaking above the upper boundary of the previous trading range. Short-term moving averages have formed a bullish crossover, and momentum indicators are aligning. The daily chart is showing preliminary characteristics of a right-side bullish arrangement. The resistance zone to watch is $4,400-$4,520 per ounce.
Bottom Support Repeatedly Tested
After gold prices fell below $4,000 per ounce in late June, the market spent about a month repeatedly testing this level. The lows in the $3,963-$3,993 per ounce range were confirmed on July 16-17. Multiple instances of prices breaking below this level and quickly recovering indicate strong buying support, solidifying the $4,000 per ounce level as a strong bottom.
Increased Open Interest + MACD Turning Positive
Pattern analysis: The decline structure appears complete. From the late February high to the mid-July low, gold traced a clear 5-wave or channel decline, with a drawdown of nearly 30%. Bottoming was repeatedly confirmed. The test of the $3,963-$3,993/855-875 yuan range on July 16-17, followed by a rapid recovery, formed the initial stages of a double bottom or rounding bottom pattern. Neckline breakout confirmation: The volume-driven breakout above the 900-920 yuan neckline in August confirmed the bottom structure, shifting the trend from bearish to bullish. K-line analysis: Reversal signals at the bottom, such as long lower shadows and bullish engulfing candlesticks, were observed. Current bullish phase: Consecutive bullish candles since August indicate strong bullish control. Short-term warning: The last 1-2 candles show longer upper shadows and smaller real bodies, suggesting selling pressure is beginning to emerge at higher levels. Volume and price analysis: Volume increased at the bottom, with noticeably larger volume bars in July, indicating capital started to buy the dip. Volume increased on the breakout: The breakout above the key neckline in August was accompanied by strong volume, making the breakout more reliable. Increased open interest, as seen on your chart, confirms that the move is driven by active long accumulation, not short covering. Indicator analysis: MACD turned positive, with the DIF and DEA lines forming a bullish crossover below the zero line and continuing to rise. The histogram bars are expanding, indicating momentum has shifted from bearish to bullish. The DIF line has just crossed or is about to cross the zero line, suggesting the bullish phase is in its early stages. Moving averages are bullish short-term: The MA5 has crossed above the MA10 and MA20, forming a bullish short-term alignment. However, the MA60 remains above, indicating a transitional state of "short-term bullish, long-term uncertain."
Outlook: Rate Hike Expectations Ahead of September FOMC Will Pressure Prices
We expect renewed volatility in expectations to be a key source of fundamental pressure on gold prices. The late-August global central bank symposium will mark the debut of new Fed Chair Kevin Warsh. How he defines the reaction function will determine whether the market prices in a rate hike surprise in September (J.P. Morgan expects a 25bp hike in September). Ahead of the September 15-16 FOMC meeting, the market will likely maintain a strong expectation of a September rate hike. Furthermore, the Iran-U.S. negotiations remain deadlocked. The probability of a long-term agreement and resumption of shipping is high, but it is difficult to judge in the short term. The impact on gold prices is two-way. If the Strait of Hormuz is restricted, it could lead to higher oil prices, rising inflation, heightened rate hike expectations, and pressure on gold. Conversely, if negotiations lead to a resumption of normal shipping, it would ease inflation pressures and remove a source of headwind for gold. In summary, we expect gold prices to trade in a high-level consolidation or periodic pullback pattern for the remainder of the quarter. Any pullbacks would represent windows for building long positions.
Outlook: The Jackson Hole Symposium as a Key Window for Policy Direction
Speeches often precede policy action. The Fed Chair's keynote address at the Jackson Hole symposium is a major indicator of the global interest rate path and asset prices. It has frequently been the venue for the Fed to confirm policy shifts, such as the 2020 announcement of a new framework, the 2022 hawkish declaration, and the 2024 announcement of rate cuts. The Fed Chair's speech typically leads FOMC action by 1-3 months. This year's symposium will be Chair Warsh's debut. Given his communication style of "clear objectives, ambiguous path," his articulation of the reaction function will directly determine pricing for the September meeting. Key question for 2026: How will Warsh define the reaction function? Inflation remains high, the target is to bring it back to 2%, and the path will be revealed at the symposium.
Strategy: Four Expressions of Volatility, Rhythm, Direction, and Basis
Sell volatility ahead of events, buy direction on pullbacks. Given our combined view of a "range-bound market ahead of the September FOMC meeting and a long-term bullish outlook," option strategies are preferable to chasing the spot price higher. Using Shanghai gold contract AU2610 as the primary target, selling strangle options allows for earning time value before the event materializes. For over-the-counter accumulator options, a mildly bullish structure can be used to average down the entry cost. Option sellers should be mindful of margin requirements and the risk of volatility spikes, controlling exposure before major event days. If gold prices pull back to key support levels, then shift to building medium-to-long-term long positions. As the domestic/foreign price ratio is at a relatively low level with room for upward correction, consider selectively going long on the ratio.
The author, Cao Shanshan, is a Senior Analyst at the COFCO Futures Research Institute, holding Trading Advisory License Number Z0013588.
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