Gold prices are hitting record highs during the European session. This rise is fueled by expectations that the US Federal Reserve will lower borrowing costs two more times this year. Concerns over a prolonged US government shutdown and ongoing trade and geopolitical tensions are increasing gold’s appeal as a safe-haven asset. Sanae Takaichi’s victory in Japan’s Liberal Democratic Party leadership contest may put off interest rate hikes by the Bank of Japan. This could weaken the Japanese Yen while boosting the US Dollar. Despite the rising USD, gold continues its upward trend, as market sentiment remains positive, even in the face of overbought conditions.

Interest Rate Speculations Drive Gold Prices

There’s a 95% chance the US Federal Reserve will cut interest rates in October and an 83% chance for December. This expectation is keeping gold prices rising since September. The uncertainty caused by potential federal layoffs due to the ongoing government shutdown talks is increasing demand for gold as a protective measure. Technical analysis points out that if gold moves above $3,900, it may spark more bullish activity. While caution is necessary due to overbought indicators, any pullback could present a buying opportunity, especially with strong support near the $3,865 to $3,863 range. Gold’s increase past $3,900 an ounce is mainly driven by anticipated Federal Reserve rate cuts. According to the CME FedWatch Tool, the market expects a 92% chance of a 25 basis point cut in November and possibly another in December. This makes non-yielding gold an appealing investment for traders. A consistent demand from central banks supports this rally, a trend that has grown since the record purchases in 2022. Recent data from the World Gold Council indicates that central banks, particularly in countries like China and India, added 250 tonnes to their reserves in the second quarter of 2025 alone. This institutional buying creates a solid price floor for gold.

Economic and Geopolitical Factors Boost Gold Prices

The economic uncertainty from the prolonged US government shutdown earlier this year still impacts growth forecasts, benefiting gold’s safe-haven status. This history of political deadlock increases gold’s attractiveness during unstable times. Globally, the Bank of Japan’s continued dovish approach, as expected since Sanae Takaichi’s LDP leadership win last year, keeps the Yen weak. This strengthens the US Dollar, which would usually decrease gold prices. However, due to strong fundamental drivers, gold is still rising despite a firm dollar. Geopolitical uncertainties also significantly support gold prices. Ongoing tensions in Ukraine and the fragile peace in Gaza keep traders anxious. These unresolved conflicts reaffirm gold’s role as a primary safe-haven asset during turbulent times. For derivative traders, the current market suggests that buying call options to take advantage of further price increases is a smart strategy, especially if prices dip towards $3,900. However, caution is advised since the Relative Strength Index (RSI) is above 70, indicating that a sharp correction could happen unexpectedly. Traders might want to consider using bull call spreads to reduce the upfront cost of long positions while still gaining from an upward trend. Alternatively, purchasing protective put options could safeguard existing long positions against a potential short-term drop. Given the current market dynamics, elevated implied volatility makes options strategies an essential tool for managing risk in the upcoming weeks. Create your live VT Markets account and start trading now.

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