Gold prices are steady around $4,370, having recently hit a high of $4,380 during the early Asian trading session. Factors contributing to this include talks of a potential U.S. government shutdown, anticipated cuts to Federal Reserve interest rates, and renewed concerns over U.S. credit risks. The government shutdown, now in its 21st day, could increase demand for gold as a safe-haven investment. With no resolution in sight, it is now the third-longest funding gap in U.S. history.

Interest Rate Speculations

Traders see a 99% chance that the U.S. central bank will cut rates next week, with another cut likely in December. Lower interest rates make holding gold cheaper, which could boost its price. On the flip side, easing trade tensions between the U.S. and China, the world’s two largest economies, might reduce gold’s allure as a safe haven. President Trump’s remarks about a possible agreement with China have calmed some worries. The upcoming U.S. Consumer Price Index (CPI) inflation data could also influence gold prices. If the CPI is higher than expected, it might strengthen the U.S. Dollar, which could impact gold prices since they are dollar-denominated. Central banks remain the largest buyers of gold, adding 1,136 tonnes to their reserves in 2022. Gold typically moves inversely to the U.S. Dollar and Treasuries. Gold is holding firm near its record high this week. We are observing how the ongoing risk of another U.S. government shutdown and rising credit concerns could draw more investors toward safe-haven options. The market is also keenly awaiting further cuts to interest rates from the Federal Reserve.

Central Bank Demand

The risk of a government shutdown is reminiscent of the extended funding gap seen in late 2018, which supported gold prices at that time. Political uncertainty is amplifying worries about U.S. credit risk, particularly following Fitch’s historic downgrade in 2023. With the national debt-to-GDP ratio above 120%, investors are understandably anxious. Expectations for a Fed interest rate cut are a key factor bolstering gold prices. The CME FedWatch Tool shows that traders expect a near certainty of another cut next week, with more to follow. Lower interest rates lessen the cost of holding non-yielding assets like gold. Additionally, central banks continue to show strong demand for gold, remaining major purchasers after record-breaking buying in 2022 and 2023 to diversify their reserves. This trend of de-dollarization creates a solid long-term support for gold prices. Conversely, any positive developments in U.S.-China trade discussions could reduce the demand for safe-haven assets. Traders should closely monitor the upcoming U.S. Consumer Price Index (CPI) data; unexpectedly high inflation could prompt the Fed to reconsider its plans, strengthening the dollar and posing challenges for gold. Create your live VT Markets account and start trading now.

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