Gold prices rose during the North American session but are still below the record high of $4,179, currently sitting at $4,140. This movement followed comments from Federal Reserve Chair Jerome Powell, who indicated that the economy might be strengthening but urged caution regarding interest rates. The chance of a 25-basis-point rate cut at the meeting on October 29 stands at 96%. Market reactions have been influenced by geopolitical issues, such as the US-China trade war and a recent US government shutdown lasting fourteen days. President Trump warned of increased tariffs on Chinese imports, while China responded with controls on rare-earth exports.

Inflation and Market Dynamics

Powell mentioned that inflation is rising mainly due to higher tariffs, rather than broad inflation trends. The slight decline in the US Dollar and decreasing Treasury yields typically boost gold’s appeal. Additionally, the National Federation of Independent Business reported a drop in small business confidence, shown by a 2-point decline in their Optimism Index. Gold is likely to stay bullish, facing resistance at $4,200. If it closes below $4,150, a pullback may occur. Central banks are significant gold buyers, having purchased 1,136 tonnes in 2022. Gold tends to increase in value when the US Dollar and Treasury yields fall, making it a safe-haven asset. With a 96% chance of a rate cut expected for the October 29 meeting, gold’s outlook appears positive. The Fed’s accommodating tone signals traders to remain optimistic. Derivative strategies should be set for a possible challenge of the $4,200 resistance level soon. This market scenario echoes conditions seen in late 2023 when the Fed hinted at halting its rate hikes. This led to a significant gold rally into 2024. Such historical trends suggest that as the first official rate cut approaches, buying momentum could surge. These circumstances support maintaining bullish positions until the Fed signals otherwise.

Risk Management and Geopolitical Factors

Given the high levels of geopolitical and domestic uncertainty, buying call options is a smart approach to capture potential gains while managing risk. The NFIB Uncertainty Index currently sits at 100, its highest in over 50 years, indicating likely elevated option premiums. Therefore, using bull call spreads could be a more cost-effective way to gain long exposure. The ongoing government shutdown and rising trade tensions with China strongly support gold prices. We experienced a similar flight to safety during the extended government shutdown in late 2018 and early 2019, which drove gold prices up. This trend, alongside the weak U.S. Dollar Index currently at 99.00, creates a favorable environment for bullion. The strong and ongoing demand from central banks provides a solid price floor. With record purchases of over 1,000 tonnes in both 2022 and 2023, this trend shows no signs of slowing. This institutional demand helps cushion any dips and stabilizes the market. The biggest risk to this optimistic outlook is the Consumer Price Index (CPI) report set for October 24. If inflation readings come in unexpectedly high, the Fed may need to reconsider its dovish stance, likely leading to a sharp decline toward the $4,100 support level. Traders should be ready for increased volatility around this data release. Create your live VT Markets account and start trading now.

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