Gold’s value increased by over 0.40%, reaching a five-week high of $4,264, largely due to expectations of a Federal Reserve rate cut. A weaker US Dollar has helped this surge, and analysts believe Gold could hit $4,300 by the end of the year. However, potential tightening from the Bank of Japan and divisions within the Federal Open Market Committee may pose challenges. The ISM reported that manufacturing contracted for the ninth month in a row in November, highlighting rising input costs and a sluggish job market. In China, high Gold prices have hurt demand, leading to some store closures. Key upcoming US economic data includes the ADP Employment Change and the Core PCE inflation measure, which the Fed closely monitors.

Market Expectations for the Fed

Expectations of a softer Fed approach have supported Gold prices, alongside rising US Treasury yields and an increase of nearly seven and a half basis points in real yields. Speculations are ongoing regarding the next Fed Chair, while the ISM Manufacturing PMI indicates persistent contraction. Currently, Gold has surpassed the $4,200 level and may soon test $4,300. The Relative Strength Index suggests there could be more upward movement, but if Gold falls below $4,200, it might drop to lower support levels. Key factors affecting Gold include geopolitical issues, interest rates, and the performance of the US Dollar. With Gold breaking through important resistance levels and markets pricing in an 87.4% chance of a Fed rate cut next week, bullish strategies are in focus. Derivative traders might consider purchasing call options or setting up bull call spreads targeting the psychological level of $4,300. This approach leverages the strong upward momentum driven by expectations of looser monetary policy. Economic data backs this outlook. The ISM Manufacturing index has now shown nine consecutive months of contraction, similar to a trend observed during the 2023 economic slowdown before a shift in Fed policy. The upcoming Core PCE inflation report is crucial. If it confirms the disinflationary trend we’ve seen over the past two years, it could give the Fed the green light to start easing.

Potential Risk Factors

Nevertheless, a divided FOMC and the risk of a sudden hawkish shift could threaten this rally. To safeguard against a sharp decline, traders should consider hedging their long positions by buying put options with a strike price below the critical $4,200 support level. This provides protection in case the Fed does not follow through on anticipated rate cuts, which could trigger a swift sell-off. We can expect increased market volatility as the Fed’s decision date approaches, alongside the release of important employment data. This rise in volatility may make buying options pricier, suggesting that vertical spreads could be a more economical way to express a directional view. Using spreads helps define risk while reducing upfront premium costs in a high-volatility environment. The weakness of the US Dollar Index is providing significant support to Gold, even as Treasury yields rise. This divergence indicates that the market is eyeing the broader picture of potential rate cuts instead of short-term bond market fluctuations. This is reinforced by strong physical demand from central banks, which added a record 1,037 tonnes to their reserves in 2022 and continue to buy aggressively, creating strong support for Gold. Create your live VT Markets account and start trading now.

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