Gold prices have soared to historic highs as more people seek safe assets due to rising global tensions. Currently, XAU/USD is around $4,290, marking an increase of nearly 11% this month and over 60% since January. The US-China trade dispute is escalating. The US plans to impose 100% tariffs on Chinese imports this November, following China’s move to limit exports of rare earth elements. This situation raises concerns about a trade war affecting global growth. Additionally, a prolonged US government shutdown may lead to over 10,000 federal workers facing potential layoffs, adding to market worries.

Benefits of a Weaker US Dollar

A weaker US Dollar and low Treasury yields make gold more appealing. The Federal Reserve is considering a more cautious approach. Fed Governor Waller hints at further rate cuts, with the market projecting a 96.7% chance of a rate cut in October and 93.7% in December. These expectations arise from worries about a softening job market, even though inflation remains above 2%. Top banks forecast gold prices could rise to $5,000 per ounce by 2026. The strong demand helps maintain a major upward trend, with support levels around $4,200 and $4,165. Despite hints of being overbought, highlighted by the RSI, a significant price drop seems unlikely soon. As gold hits new all-time highs near $4,290, derivative traders are advised to position for further upward movement driven by strong demand for safe-haven assets. The metal’s 60% increase this year stems from a mix of economic and geopolitical fears that show no signs of fading. Strategies like long call spreads, which benefit from rising prices and high volatility, are attractive in this situation. The renewed US-China trade war is a key factor, with the threat of 100% tariffs causing serious global growth concerns. China’s past restrictions on gallium and germanium in 2023 indicate a pattern, but the current potential ban on all rare earth elements represents a much more serious escalation. This uncertainty will likely continue to support gold as a hedge against risks. The ongoing US government shutdown is another source of instability, now costing the economy over $15 billion weekly. This figure is significantly higher than the $11 billion total from the 35-day shutdown in 2018-2019. This domestic chaos weakens the US dollar, further boosting gold’s appeal.

Federal Reserve Position

The Federal Reserve’s cautious approach is creating favorable conditions, as markets expect nearly 100% chances of rate cuts in October and December. This shift is in response to a weakening job market, with unemployment rising from the historic lows below 4% seen just two years ago in 2023. Lower interest rates reduce the cost of holding non-yielding gold, making it more attractive to investors. Major financial institutions support this optimistic outlook, predicting that gold could reach $5,000 by 2026. This strong confidence from institutions suggests the current rally is likely to last, encouraging traders to maintain long positions. For those trading derivatives, buying call options is a straightforward method to benefit from potential gains while keeping risk defined. With the metal showing a strong trend, purchasing on small dips around support levels like $4,200 could offer good entry points. Additionally, selling cash-secured puts below key support levels can be a viable strategy to earn premiums while setting lower entry prices. Even though the trend is highly positive, the Relative Strength Index is over 77, indicating a short-term pullback might occur. Cautious traders should consider using stop-losses on futures or buying protective puts to hedge long-term positions. However, any correction is viewed as a buying opportunity, not a shift in the main trend. Create your live VT Markets account and start trading now.

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