Gold prices have increased, approaching a three-week high. This rise is driven by worries about the US economy and expectations that the Federal Reserve might cut interest rates. A weaker US Dollar, influenced by these expectations and current US government issues, is also helping gold’s upward movement. On Wednesday, gold (XAU/USD) gained interest in Europe, climbing from below $4,100. Even with a positive outlook for reopening the US government, gold remains appealing due to weak economic data, stabilizing on a higher trend.

Economic Impact of Government Shutdown

Experts believe that the ongoing US government shutdown may have lowered GDP growth by around 1.5 to 2.0%. Employment figures revealed a loss of 9,100 jobs in October, and government payrolls decreased by 22,200, indicating a struggling labor market. From a technical perspective, the XAU/USD pair shows a mixed outlook. Positive indicators hint at possible further gains, but if gold fails to surpass critical resistance levels like $4,150, it could lead to bearish sentiment, pushing prices down towards $4,025. The Federal Reserve’s interest rate policy greatly impacts gold prices and the US Dollar. Lower interest rates typically weaken the Dollar, while Quantitative Easing (QE) further diminishes its value by flooding the market with credit and bond purchases. On the other hand, Quantitative Tightening (QT) usually strengthens the Dollar. As gold garners more interest, derivative traders might want to explore positions that profit from continued price increases, especially with the market anticipating a Federal Reserve rate cut. The primary concern driving this trend is the weakening US economic growth, which has gained attention following the prolonged government shutdown. This situation makes holding non-yielding gold more appealing. The economic effects of the shutdown seem considerable, with estimates suggesting a potential 1.5% to 2.0% reduction in quarterly GDP. To put this in context, a previous 35-day shutdown from 2018-2019 was estimated by the CBO to have decreased GDP by only about 0.2%, highlighting how serious the current crisis is. This supports expectations that the Fed will take action to bolster the economy.

Strategies for Capitalizing on Gold’s Momentum

In light of this situation, buying call options with strike prices around the $4,200 resistance level could be a good strategy in the coming weeks. Traders might consider options that expire in early 2026 to give time for the expected increase. This would provide an opportunity for a leveraged gain on gold’s upward trajectory as new economic data is released. However, the positive sentiment after the government’s reopening might limit immediate gains. To navigate this uncertainty, a bull call spread could be a safer approach than an outright long call. This strategy involves buying a call at a lower strike price while selling one at a higher price, reducing the initial cost and potential losses. The market’s expectation for a more dovish Fed is similar to the sentiment seen in late 2023, which came before a phase of dollar weakness and strong performance in precious metals. For those with a somewhat positive outlook, selling out-of-the-money put options near the $4,000 psychological support level is another strategy to consider. This allows traders to earn premium while profiting if gold remains above that important level. Watch closely for the $4,155 resistance area; a sustained move above this level would indicate strong bullish momentum, likely leading to more buying. Conversely, a clear drop below the $4,075 support level would suggest the upward trend is weakening, potentially signaling an exit from bullish positions or the need for short-term protective hedges. Create your live VT Markets account and start trading now.

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