Gold prices have decreased slightly from their three-week high, facing selling resistance around $4,150. Currently, gold is priced at about $4,107 and is struggling to maintain earlier gains this week. A deal to prevent a US government shutdown has reduced safe-haven investment in gold, despite ongoing fiscal concerns and geopolitical risks that still support demand. In terms of technical analysis, gold’s near-term outlook is positive as long as it stays above the $4,100 level, with immediate resistance at $4,150 and support at $4,050.

Federal Reserve Impact on Sentiment

Expectations for a dovish Federal Reserve are keeping sentiment positive; however, recent profit-taking has followed optimism regarding a government reopening. The release of important economic data might push for further monetary easing if signs of a US economic slowdown appear. Additionally, geopolitical issues and weak US job data have affected the US Dollar, helping support gold prices. The US Dollar Index is close to two-week lows, marking its fifth consecutive day of losses. The temporary funding deal for the US government lasts until January 30, raising the risk of another shutdown. ADP data shows a decline in private-sector jobs in the US, which adds pressure on the Dollar and raises the likelihood of further easing from the Fed. With the government shutdown ending, investors are also considering mixed trade signals from China and ongoing trade discussions with India and Switzerland. Gold, with its appeal as a safe haven, continues to attract attention amid economic uncertainties. Central banks have significantly increased their gold reserves, especially in 2022. As a non-yielding asset, gold benefits from lower interest rates and typically moves inversely to the US Dollar and Treasuries. As gold retreats from the $4,150 resistance level, we are witnessing typical short-term profit-taking. The temporary deal that ended the US government shutdown has eased concerns for now, but traders should see this dip as a potential opportunity rather than a sign of a trend reversal. The main factors boosting gold—expectations of a dovish Fed and geopolitical risks—have not diminished. A crucial date to monitor is January 30, when temporary government funding ends. This creates a fiscal cliff that could trigger another safe-haven rally. We should recall how gold reacted after the 2013 government shutdown; it experienced volatility before long-term debt concerns provided support for prices. With national debt now over $38 trillion, these long-term fiscal concerns are more significant than ever.

Trading Strategy and Market Positioning

For options traders, the pullback toward the $4,100 support level is a crucial time. With the Relative Strength Index (RSI) cooling from overbought status, selling cash-secured puts or bull put spreads with a strike price below the important $4,050 support zone could be a way to gain bullish exposure at a better price. This strategy has the potential to benefit from both a price rebound and increased implied volatility due to ongoing fiscal uncertainty. The weakness of the US Dollar provides a strong boost for gold. The Dollar Index is struggling around 99.30, and with recent ADP data showing job losses in the private sector, the market is expecting more aggressive actions from the Federal Reserve. The CME FedWatch Tool now indicates an over 85% probability of a 25-basis-point rate cut at the December FOMC meeting, which would further pressure the Dollar and support gold. Regarding market positioning, there is a noticeable increase in call options with a $4,200 strike price, indicating that many traders are preparing for a breakout above the current resistance. However, the VIX, while down from recent highs, is still around 19, suggesting that traders remain cautious about overall market stability. Therefore, those with a more bearish view in the short term might consider selling call spreads above the $4,150 resistance to collect premiums while the market consolidates. The physical market also confirms the bullish sentiment, as major gold-backed ETFs have reported net inflows of over 15 tonnes in the last two weeks. This indicates that long-term investors are taking advantage of this price level to increase their holdings, treating any dip as a buying opportunity. This underlying physical demand offers strong support that traders in derivatives should keep in mind. Create your live VT Markets account and start trading now.

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