Gold price (XAU/USD) has reached a new high of around $5,220 during Asian trading on Wednesday. This rise is due to a weaker US Dollar, geopolitical tensions, and economic uncertainty, as traders await the Federal Reserve’s interest rate decision. US President Donald Trump stated that the Dollar is strong, which caused the US Dollar Index to drop to its lowest point since February 2022. This decline helps commodities priced in USD, like Gold, providing extra support.

Global Instability and Safe Haven Demand

Amid global instability and trade threats, the demand for Gold as a safe-haven asset has increased. In January, Trump threatened Europe with tariffs and indicated aggressive actions regarding Greenland and Venezuela. He also recently warned about tariffs on Canadian goods if they cooperate with China. The Federal Reserve is expected to keep its interest rate between 3.50% and 3.75%. Although the Fed cut rates three times last year, traders are looking to Fed Chair Powell’s comments for clues about future policies. A hawkish tone could prevent further losses for the Dollar and put pressure on Gold prices. “Risk-on” means investing in riskier assets, which usually boosts stock markets and most commodity prices, except Gold. “Risk-off” leads to increases in Bonds, Gold, and safe-haven currencies like USD, JPY, and CHF, due to their stability in crises. Gold pushing past $5,220 indicates a strong risk-off sentiment in the markets. The CBOE Gold Volatility Index (GVZ) is hovering near 25.5, the highest level since the banking concerns in March 2025. This high volatility suggests that sharp price changes are likely, leading to increased option premiums.

Federal Reserve Decision and Market Reaction

All attention is on the Federal Reserve’s decision later today, which is crucial for the coming weeks. While the CME FedWatch Tool shows a 98% chance that rates will stay at 3.75%, the real impact will come from Jerome Powell’s press conference. Any indication of a hawkish approach to tackle ongoing inflation, which rose to 4.1% last month, could cause a sharp sell-off in gold. With gold at these record heights, outright call options are expensive due to high volatility. A smarter strategy might involve vertical spreads to limit risk, such as bull call spreads to aim for a move towards $5,300. Alternatively, buying put options can be a cost-effective way to protect against a potential dip if the Fed comments unexpectedly aggressively. The US Dollar Index (DXY) is a significant boost for gold, having dropped over 3% since the year began, now trading below 99.50. We see this weakness as a long-term issue, influenced by ongoing political discussions and trade threats that won’t resolve quickly. This situation should provide a solid support level for gold prices, making any downturn caused by the Fed a buying opportunity for long-term investors. Create your live VT Markets account and start trading now.

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