Gold is currently trading around $4,120 in the early Asian market on Tuesday, following a recent peak. The rise in gold prices comes from expectations of a Federal Reserve interest rate cut and a weaker US Dollar. Reports show a 67% chance of a 25 basis point rate cut in December, increasing to 80% by January, according to the CME FedWatch tool. Rate cuts can lower the opportunity cost of holding gold, making it more attractive to investors.

US Government Shutdown

Despite the increase in gold prices, the potential end of the US government shutdown could impact its value. The US Senate is making progress on a plan to reopen the government, which is expected to lift the shutdown by the end of the week. Gold has always been viewed as a store of value. It acts as a safe haven and hedge against inflation, often bought by central banks. In 2022, central banks purchased a record 1,136 tonnes of gold. Gold’s value tends to rise with a weaker US Dollar and lower interest rates, but it may drop when the stock market does well. Because gold is priced in US Dollars, it benefits when the Dollar weakens. With gold staying above $4,100, our main focus is the upcoming Federal Reserve meeting. Expectations for a rate cut have strengthened after last week’s Consumer Price Index (CPI) report showed inflation falling to 2.8% year-over-year, which gives the Fed more room to act. This is further supported by recent job data, which revealed nonfarm payrolls were below expectations for the second month in a row.

Traders’ Strategies

There is a strong chance of a rate cut already reflected in the derivatives market, leading to rising implied volatility for December and January gold options. This suggests that traders expect a significant price movement around the next FOMC announcement. Therefore, simply buying futures could introduce unnecessary risk if the Fed surprises with a hawkish stance. Instead, traders are using bull call spreads on XAU/USD to take advantage of potential price increases while limiting the premium paid, which is increasing due to higher volatility. This risk-defined strategy appears wise, especially since a resolution to the government shutdown could raise risk appetite in the short term. A spread targeting the $4,150-$4,200 range for January could be a smart way to prepare for a dovish Fed outcome. Recent Commitment of Traders (COT) reports show a consistent increase in net-long positions held by managed money over the last month. This suggests that institutional investors are also gearing up for a weaker dollar and lower interest rates as we move into early 2026. The growing open interest in gold futures reinforces that new capital is entering the market. Looking back, a similar trend occurred in mid-2019 when the Fed switched from raising to cutting rates, leading to a major multi-month rally in gold prices. Traders who recall that time may see the current situation as a familiar signal for ongoing strength in gold. The main difference now is that gold starts at a much higher price, which could lead to more profit-taking if the Fed shows any hesitation. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now