Fed comments and US-China tensions helped boost gold prices this week. Fed Chair Jay Powell’s speech highlighted concerns about labor market risks, which seemed to overshadow worries about inflation. New FOMC member Stephen Miran, who supports former President Trump, pushed for a 50 basis point interest rate cut. He also mentioned the possibility of two more cuts this year, matching what the market expects.

Interest Rate Expectations

Interest rate expectations for next year have dropped since last week. The Fed Funds Futures for the end of 2026 now suggest rates might be 20 basis points lower, indicating a potential of more than five rate cuts from current levels. The renewed conflict between the US and China poses a threat to the global economy. Additionally, concerns about regional banks in the U.S. add to market uncertainties. The outlook for gold appears bright as Fed Chair Powell shows a shift towards prioritizing the labor market, despite inflation still being above target. This supportive stance from Powell and other key Fed officials hints that interest rate cuts are imminent. For us, this signals that the cost of holding gold, a non-yielding asset, is likely to decrease, making it more attractive. This perspective is reinforced by recent data: last week’s initial jobless claims rose to 245,000, a three-month high. While the latest Core PCE reading of 2.9% is above target, the noticeable slowdown in price pressures allows the Fed to focus more on employment. This backdrop strengthens the market’s expectation for a near-term 50 basis point cut.

Derivative Trading Opportunities

For those trading derivatives, this outlook suggests buying call options on gold futures or gold-backed ETFs. This strategy provides leveraged exposure to potential price gains while managing risk. We believe preparing for a price increase in the coming weeks is a wise response to the Fed’s clear signals. Adding to this positive outlook is the renewed trade tension between the US and China, which raises fears of an economic slowdown. We are also witnessing renewed stress in some regional bank stocks in the U.S., reminding us of the turbulence from 2023. These conditions create a risk-off atmosphere that has historically benefited gold prices. We’ve seen this scenario before, particularly in 2019 when similar global economic concerns led the Fed to cut rates, spurring a gold rally. That time showed how a shift in the Fed’s tone can lead to rapid price increases for precious metals. Currently, the Fed Funds Futures market is pricing in over five 25 basis point cuts by the end of 2026, suggesting that this isn’t just a short-term expectation. With the dual threats of economic risks and central bank easing, traders should also explore strategies that benefit from rising volatility. Buying straddles or strangles on gold could effectively position traders for significant price movements, no matter the initial direction, as uncertainty increases. We believe that implied volatility in gold options may be undervalued given the array of risk factors at play. Create your live VT Markets account and start trading now.

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