Gold has stabilized as traders await the Federal Reserve’s (Fed) decision. After hitting a three-week low of $3,886, Gold is now trading at $3,998, ending a three-day losing streak. The ongoing US government shutdown has created a lack of key economic data, leading to speculation that the Fed might lower borrowing costs. This is despite the latest Consumer Price Index (CPI) not impacting these expectations.

Expectations for Fed’s Decision

Traders anticipate a 25-basis-point decrease in interest rates, potentially followed by another cut in December. All eyes are on Fed Chair Jerome Powell’s comments, which could influence Gold prices. If Powell maintains a bullish stance, Gold might decline further, testing this week’s low. If not, a rebound to $4,000 is achievable. In South Korea, the central bank is considering increasing its long-term Gold reserves. Meanwhile, the US Dollar Index and 10-year Treasury yields have remained steady, with a slight rise in US real yields. In 2022, central banks added 1,136 tonnes of Gold, making it the biggest annual purchase on record. Gold often spikes in price during times of geopolitical instability or recession fears due to its safe-haven status. The performance of Gold is closely related to the strength of the US Dollar; it usually rises when the Dollar weakens and falls when the Dollar strengthens. With the Fed expected to cut rates, the current pause in Gold presents a chance for traders looking to position themselves for the coming weeks. This shift began in late 2023 and early 2024 as the US national debt surpassed $34 trillion, making it hard to keep rates high. Traders might view any dip below $4,000 as a good entry point for bullish strategies. The push towards the $4,000 mark builds on strong central bank demand over several years. This trend gained momentum in 2022 and 2023, with central banks, particularly in emerging economies, purchasing over 1,000 tonnes of Gold annually, according to World Gold Council data. The recent news that South Korea may boost its reserves for the first time since 2013 indicates that this strong buying trend is likely to continue.

Strategies for Traders

For derivative traders, current market conditions favor strategies that take advantage of upward momentum while managing the risk of a hawkish surprise from the Fed. Buying call options on XAU/USD or Gold futures with strike prices just above $4,000 provides a defined-risk way to profit from a potential breakout towards the $4,075 target. Alternatively, purchasing inexpensive, short-dated put options can hedge against any unexpectedly strong comments from Fed Chair Jerome Powell. A daily close above the important $4,000 psychological level is essential to confirm a return of bullish momentum. The Relative Strength Index indicates that buyers are gaining strength, suggesting further price increases are likely soon. If XAU/USD surpasses the 20-day moving average at $4,075, we could see a move toward the October 22 peak of $4,161. The ongoing government shutdown adds uncertainty, ultimately favoring Gold. This situation creates economic instability and deprives the Fed of crucial data. The absence of clear inflation and employment figures will likely make the central bank act more cautiously, strengthening the case for a rate cut. This data vacuum can be seen as bullish for Gold, enhancing its appeal as a safe-haven asset during turbulent times. Create your live VT Markets account and start trading now.

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