Gold is currently trading within a tight range, sitting around $3,975 after dipping to $3,928 on Tuesday. Demand for gold remains strong due to a global shift towards risk aversion. Concerns are rising over US tech stocks and the possibility of corrections in their valuations. This unease has spread through both Asia and Europe. Adding to the complexity, the US government has been in a shutdown for 36 days.

The Influence of the US Dollar

The US Dollar is gaining strength, which is hindering gold’s price increases. However, fear in the market is still providing some support for gold. Recently released ADP data shows that private employment rose by 42,000 in October, surpassing expectations. Additionally, the ISM Services PMI indicates growth in this sector. In the political arena, President Trump has issued executive orders to ease trade tensions with China, but the US Supreme Court is reviewing tariffs related to these orders after lower courts ruled against them. The potential for interest rate cuts by the Federal Reserve is currently unclear. There is a 68% chance of rate cuts in December, a decrease from 94%. Due to the shutdown, official economic data is delayed, which impacts the Fed’s forecasting ability. Technically, gold is showing signs of indecisiveness, with a slight bearish lean as it trades below the 21-period Simple Moving Average. The Relative Strength Index is sitting at 44, indicating weak momentum and suggesting that gold may continue to trade within its current range. Gold remains trapped between $3,900 and $4,050, reflecting substantial indecision in the market. In the short term, strategies that profit from low volatility could be beneficial. However, several events on the horizon could lead to a significant price breakout.

The Shutdown’s Impact

The strong US dollar, currently at a multi-month high of 100.30 on the DXY, is the main factor keeping gold prices down. Strong private payroll numbers and a rebound in the ISM Services PMI are driving this dollar appreciation. In this context, bearish strategies, such as buying put options targeting a drop below the $3,900 support level, could be appealing if strong US economic data continues to emerge. Conversely, the ongoing US government shutdown, now the longest in history at 36 days, is increasing risk aversion, which helps support gold prices. During a similar shutdown from 2018 to 2019, which lasted 35 days, gold rose by about 3%. The longer this shutdown lasts, the higher the likelihood of a price rally due to economic uncertainty. The Federal Reserve’s current position also adds tension, with the market predicting a 68% chance of a December rate cut. Although this probability has decreased, it still provides a support floor for gold prices. Any indications of economic weakness caused by the shutdown could quickly raise these odds back above 90%, potentially triggering a sharp increase in gold and making call options a strategic choice. Additionally, we should monitor inflation, as the ISM Prices Paid component has surged to 70.0, a notably high figure. This suggests ongoing inflationary pressures, which typically enhance gold’s appeal as a hedge. This situation is similar to 2022 when central banks purchased a record 1,136 tonnes of gold, highlighting its long-term value against inflation. One key event to watch for this week is the Supreme Court hearing regarding presidential tariff authority. A ruling that limits these powers could weaken the US dollar and push gold prices up, while a decision to uphold them could strengthen the dollar. The uncertainty surrounding this ruling suggests that volatility may return soon, making it wise to prepare for a breakout from the current tight trading range. Create your live VT Markets account and start trading now.

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