Fed Policy Outlook
The Fed is expected to keep the federal funds rate unchanged at 3.50%–3.75% at its March meeting on Wednesday. Some forecasts place the next reductions in 2026, with the pace and size not yet clear. Fed funds futures now price out a September cut and point to one cut in December, according to the CME FedWatch tool. Market pricing has shifted as inflation risks remain in focus. Gold is widely used as a store of value and a medium of exchange, and is also purchased for jewellery. It is often used as a hedge against inflation and currency weakness, as it is not tied to a single issuer. Central banks are the largest holders of gold. They added 1,136 tonnes worth about $70 billion in 2022, the highest annual total on record, according to the World Gold Council.Market Drivers And Positioning
Gold often moves opposite to the US Dollar and US Treasuries. It also tends to move against risk assets, and can be affected by geopolitical events, recession fears, and interest-rate changes. Based on the environment we saw develop in 2025, the path for gold in the coming weeks appears guided by interest rate expectations over geopolitics. The persistent conflict in the Middle East drove oil above $100 last year, which we can now see directly influenced the Fed’s decision to delay rate cuts. This has established a high-rate environment that continues to pressure non-yielding assets like gold. With this backdrop, volatility should be a primary focus for derivative traders. We are seeing implied volatility in gold options tick up, similar to the 15-20% levels observed during the early stages of the 2022 Ukraine conflict, reflecting the market’s uncertainty between geopolitical risk and monetary policy. This suggests strategies like long straddles or strangles could be positioned to profit from a significant price move in either direction, regardless of the catalyst. The prevailing trend, however, is downward pressure from high interest rates, making protective puts or bear put spreads logical positions. Options market data shows a growing skew, with puts trading at a higher premium than calls, indicating a collective expectation of further downside or at least a high demand for downside protection. A break below the psychological $5,000 level could trigger further selling toward support levels we haven’t seen since late 2024. Still, we must acknowledge the strong underlying support from central bank buying, which has continued unabated. World Gold Council data showed that central banks added a net 800 tonnes in 2023 and we saw that trend continue through 2025, providing a floor for prices. Therefore, traders might consider selling cash-secured puts at lower strike prices, aiming to collect premium while being willing to own gold at a significant discount if a sharp, unexpected sell-off occurs. The inverse relationship with the US Dollar remains a critical factor to watch. Last year, the Dollar Index (DXY) rallied strongly as rate cut expectations faded, directly weighing on gold prices. We should therefore monitor options on currency-tracking ETFs as a leading indicator for gold’s next move. Create your live VT Markets account and start trading now.
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