Gold prices have dropped more than 4% after hitting record highs close to $4,380. The decline is mainly due to a stronger US Dollar and improved trade relations between the US and China, which lowers the demand for gold as a safe haven. Right now, Gold (XAU/USD) is trading at about $4,135, down nearly 5% from a brief peak of $4,081. The technical analysis shows a possible double top pattern on the 4-hour chart, hinting at a further drop below $4,200.

Impact of US-China Trade Discussions

The improved outlook on US-China trade talks is affecting gold prices. If the proposed 100% tariffs on Chinese products are avoided, it could boost riskier assets and strengthen the US Dollar. Despite the recent drop in gold prices, the overall outlook stays positive due to expectations of a more cautious Federal Reserve. Lower interest rates favor non-yielding assets like gold. Ongoing geopolitical and economic uncertainties continue to draw investors to safe havens. President Trump expressed optimism for a good trade deal with China at the APEC Summit but warned of potential 155% tariffs if no agreement is reached. Additionally, the US government shutdown and a strong US Dollar are also impacting the market. The sharp pullback in gold prices signals a short-term bearish trend. The double top pattern around $4,380 indicates that momentum is weakening. This makes put options a solid strategy for anticipating further declines. If gold breaks below the $4,200 level, it could test support near $4,050 in the following weeks.

Upcoming CPI Data and Market Outlook

We need to closely watch this Friday’s delayed Consumer Price Index (CPI) data, as it will affect the Federal Reserve’s upcoming decisions. Markets are expecting a 98.9% chance of a rate cut this month, according to the CME FedWatch tool, based on recent trends showing inflation is moderating from previous highs. Any surprises in the CPI report could lead to significant market volatility for both gold and the dollar. This pullback might also represent a good opportunity for long-term bullish positions, especially with a highly dovish Fed expected. We could look at buying call options with January 2026 expirations to prepare for a rebound after the anticipated rate cut announcement on October 30. This approach allows us to take advantage of the fundamental support for gold, even amid current bearish trends. The US Dollar Index, currently around 98.84, poses challenges for gold prices. It’s important to note that the dollar soared to over 114 in late 2022, so while it’s strong now, it’s not at an extreme level historically. If the Fed makes a decision that weakens the dollar, gold could see a sharp recovery. With mixed signals from trade optimism and dovish monetary policy, we expect significant volatility ahead. The ongoing US government shutdown adds more uncertainty that could escalate at any time. A strategy based on volatility, such as a long straddle using options, might be wise to benefit from large price swings in either direction as events unfold. Create your live VT Markets account and start trading now.

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