Gold prices dropped to $4,032 before making a small recovery, hovering below $4,100 as the likelihood of a December interest rate cut fell to 50%. This decline was driven by Federal Reserve officials’ worries about ongoing inflation, leading to speculation about halting rate reductions. On Friday, gold fell nearly 2% as more people speculated about the Fed pausing its easing approach. At the time of writing, the price was $4,100, showing a decrease of 1.72%.

Inflation Concerns and Rate Cut Expectations

Expectations for a rate cut in December decreased from 72% to about 50%. Concerns about inflation continue amid a weak job market. Kansas City Fed’s Jeffrey Schmid, who previously opposed some measures, expressed ongoing worries about inflation and chose to keep rates unchanged. The release of US government data is delayed, impacting key economic indicators that influence rate decisions. The US Dollar Index slightly rose by 0.08% to 99.31, while US Treasury yields increased. Gold remains a popular safe-haven asset during economic instability, attracting central banks looking to diversify their reserves. In 2022, central banks added a record 1,136 tonnes, valued at $70 billion, with countries like China and India boosting their gold holdings. Gold’s value behaves inversely to the US Dollar and Treasury yields. It typically fluctuates based on interest rate adjustments and the dollar’s performance, responding to geopolitical unrest or recession worries. With a 50% chance of a December rate cut, we can expect more volatility in gold prices. The mixed signals from the Fed, with some officials highlighting high inflation and others noting a weakening economy, contribute to this uncertainty. This situation is ideal for strategies that benefit from price fluctuations instead of a specific market direction. The ongoing government shutdown and delays in economic data leave us in the dark, heightening market anxiety. Past experiences, like the 2013 shutdown that delayed job reports, resulted in sharp and unpredictable market movements. We should be ready for a similar response when the Bureau of Labor Statistics (BLS) eventually releases its numbers. Recently, the University of Michigan Consumer Sentiment index dropped to 60.2, indicating underlying economic weakness that may need the Fed’s attention.

Market Strategy Amidst Volatility

Given this uncertainty, considering options to buy volatility might be wise in the coming weeks. The Gold Volatility Index (GVZ) recently rose over 15% this week to 18.5, with potential for further increases. Using straddles or strangles on gold futures or popular ETFs allows us to profit from large price movements, regardless of direction once the delayed data is out. In the short term, gold prices seem likely to trend lower as rising real yields and a strengthening dollar create challenges. Recently, major gold ETFs experienced net outflows exceeding $2 billion in just three trading sessions, reinforcing a bearish outlook. Traders might think about buying puts or initiating short futures positions, targeting a return to the 20-day moving average at $4,064, and possibly testing the October low around $3,886 if the price falls below that level. However, the long-term upward trend remains, and we must note that significant buying from central banks sets a strong support for the market. In 2022, central banks amassed a record 1,136 tonnes, and reports for Q3 2023 indicate they’re on track to acquire another 950 tonnes this year. Thus, selling cash-secured puts or buying call spreads on dips toward the $3,900 level might be a smart way to prepare for the next upswing. For now, our key indicators are the US Dollar Index and Treasury yields. With the 10-year yield staying above 4.10% and the DXY remaining above 99.00, any further strength in these markets could push gold down to test crucial support levels. Keeping a close watch on their inverse relationship is vital since it significantly influences short-term price movements. The differing views among Fed officials, like the hawkish Schmid and dovish Miran, suggest that public statements will serve as trading signals. We should interpret any hawkish comments as indications that gold prices may face downward pressure, while dovish remarks could spark short-covering rallies. This ongoing debate within the Fed will likely maintain the volatile trading range between $4,000 and $4,200. Create your live VT Markets account and start trading now.

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