Gold prices increased by over 1%, crossing the $4,200 mark for the first time in ten days. This rise is linked to market expectations for further easing from the Federal Reserve, with a 0.25% cut likely at their December meeting, which has an 87% probability. Although Fed officials have kept quiet during the Thanksgiving holiday, there are ongoing disagreements about policy. Comments from key Fed members indicate a more relaxed approach, despite the strong job market. Currently, inflation is steady, as indicated by a Producer Price Index (PPI) of 3.1% year-over-year, down to 2.7%.

Geopolitical and Economic Influences

Changes in the geopolitical situation, particularly involving Russia and Ukraine, may limit gold’s gains. Upcoming U.S. economic data, such as November’s ISM PMIs and the ADP Employment Change, will be crucial in the week ahead. Gold prices have solid support above $4,200 and may test recent highs. If it goes beyond $4,300, it will be close to its record high of $4,381. On the downside, important support levels include $4,109 and the 20-day Simple Moving Average. Central banks remain significant buyers of gold, adding 1,136 tonnes in 2022, mainly for economic stability. Gold prices are also tied to movements in U.S. Treasuries and the U.S. Dollar. With gold staying strong above $4,200, the market has nearly fully accounted for a Federal Reserve rate cut in December. The latest figures from the CME FedWatch Tool indicate an 89% probability of a 25-basis-point cut, implying that gold prices may continue to rise for now. Traders might consider call options on gold futures or related ETFs in anticipation of the possibility of record highs.

Key Economic Indicators and Market Strategies

This cautious sentiment is supported by recent inflation data, reinforcing the case for easing. The Core PCE Price Index, the Fed’s favored measure of inflation, cooled to 2.9% year-over-year in October. This trend helps policymakers justify moving toward lower rates to support the economy. However, a significant risk is emerging from the peace talks between Russia and Ukraine, which could limit gold’s appeal. A successful breakthrough in discussions might reduce gold’s safe-haven status and lead to a sudden price drop. We recommend considering protective put options as a hedge against long positions in the coming weeks. Implied volatility for gold options is likely to stay high leading up to the Fed meeting on December 10th and as geopolitical news unfolds. This situation may favor strategies that profit from volatility decay, such as selling out-of-the-money credit spreads, for traders expecting prices to remain stable. Nevertheless, the risk of a big price swing means these positions should be handled with care. Next week’s data, notably the ISM reports and the ADP employment numbers, will be pivotal. The last Non-Farm Payrolls report for October showed an increase of 175,000 jobs, healthy but below the average for 2024, indicating a gradual cooling in the labor market. A surprisingly strong report could slightly adjust rate cut expectations ahead of the Fed meeting. It’s important to recall why gold is at these levels. Looking back at 2023 and 2024 trends, aggressive buying by central banks diversifying away from the U.S. dollar has bolstered gold prices. Data from the World Gold Council earlier this year confirmed that central banks continued their record buying spree into 2024, adding a net 800 tonnes to their reserves. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now