Gold is trading above $4,000, currently around $4,021, despite a small dip of 0.50% on Thursday. The metal reached a peak of $4,059, driven by demand for safety during uncertain political and global situations. The US government has been in a shutdown for nine days, raising worries in the market. This affects federal services and the release of economic data. The shutdown complicates the Federal Reserve’s decisions about interest rates, with cuts expected in October and December.

Federal Reserve’s Monetary Policy

According to the CME FedWatch tool, there’s nearly a 100% chance of rate cuts. This impacts US Treasury yields and the US Dollar, both helping to keep Gold prices steady. Globally, tensions remain high; however, a ceasefire between Israel and Hamas offers some short-term relief. The ongoing conflict in Ukraine and tensions between the US and China also influence market sentiment. Gold is viewed as a safe investment, protecting against inflation and economic instability. Central banks are buying significant amounts of Gold to boost their economies, acquiring 1,136 tonnes in 2022—an all-time high. Gold prices typically rise when the US Dollar and Treasuries fall, often during times of economic uncertainty. With gold remaining strong above $4,000, this environment supports continued bullish positions. The US government shutdown delays important economic data, forcing the Federal Reserve to make decisions with limited information. This uncertainty, along with a likely rate cut in October, should weaken the dollar and strengthen gold. Since the market expects a 100% chance of a Fed rate cut this month, we should explore long positions using call options or futures contracts that expire in late 2025. This strategy allows us to benefit from potential buying after the Fed begins to ease its policies, similar to the environment during the 2019 rate-cutting cycle, which led to a multi-year rally in gold.

Geopolitical Factors Supporting Gold

The heightened geopolitical risks—from the fragile ceasefire in the Middle East to the ongoing conflict in Ukraine—provide a strong support level for gold prices. The Cboe Gold ETF Volatility Index (GVZ) is around 21, much higher than its long-term average, indicating high volatility. This makes strategies like bull call spreads appealing, as they lower the costs of buying calls outright while still offering potential for gains. We should also remember the impact of past government shutdowns, like the 35-day shutdown from 2018 to 2019, which caused notable market fluctuations. If the current stalemate goes on, we anticipate a rise in demand for gold as a safe haven. This reinforces the idea of using gold not only for speculation but also to hedge against possible dips in stock markets. The trend of central banks purchasing gold adds to our confidence in higher gold prices. After the record buying in 2022 and 2023, central banks have continued to be net buyers, adding over 200 tonnes in the first quarter of this year. This ongoing demand, especially from emerging markets, indicates a global shift away from the US dollar. Create your live VT Markets account and start trading now.

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