Gold prices have edged higher to nearly $3,990 during Friday’s early Asian session. The ongoing US government shutdown, now in its sixth week, is a primary driver, coupled with uncertainty over US tariffs, boosting demand for safe-haven assets like gold.
The prolonged shutdown is the longest in US history and is contributing to a weaker US Dollar. Employers have also cut over 150,000 jobs in October, marking the largest job reduction in over two decades. The recent job cuts have prompted the Federal Reserve to lower interest rates, which typically supports the non-yielding precious metal.
Central Banks Increasing Gold Reserves
Central banks, notable buyers of gold, added 1,136 tonnes worth approximately $70 billion to their reserves in 2022. This is the highest on record. Banks from emerging economies such as China, India, and Turkey are significantly increasing their gold holdings.
Gold often moves inversely to the US Dollar and is affected by geopolitical instability and economic fears. As a yield-less asset, it benefits from lower interest rates, while a strong US Dollar or higher interest rates tend to suppress its price. The price also hinges on global economic factors and investor behaviour in response to market conditions.
With gold holding near the critical $4,000 level, the prolonged US government shutdown and weak October jobs report are creating a strong bullish environment. This level of uncertainty means we should expect volatility to remain high for the foreseeable future. For traders, this translates into expensive options premiums, making outright purchases costly but offering opportunities for those selling premium.
The clear upward momentum makes buying call options a straightforward strategy for playing a breakout above $4,000. However, given the high implied volatility, a more prudent approach would be using bull call spreads. This would lower the entry cost by selling a higher-strike call, though it would also cap the potential profit.
Impact of a Weaker US Dollar
This price action is strongly supported by a weaker US Dollar, with the DXY recently falling below 98 for the first time in over a year. We saw a similar, though less dramatic, pattern during the government shutdown of 2018-2019, where gold gained steadily as uncertainty weighed on the dollar. This historical precedent gives us confidence that the current safe-haven bid is well-founded.
The Fedspeak scheduled for today represents the most immediate risk, as any hint of hawkishness could spark a rapid sell-off from these record highs. Traders anticipating a major price swing following the remarks, but unsure of the direction, could consider using long strangles to profit from a sharp move either way. This is also a prudent stance ahead of the flash U-Mich Consumer Sentiment numbers.
Looking at market data, we’ve seen open interest in COMEX Gold futures increase by over 15% in the last month, showing significant new money is backing this rally. The Cboe Gold Volatility Index (GVZ) is currently elevated near 26, confirming the market’s expectation of large price swings. These conditions suggest that while the trend is up, any positions should be managed with tight risk controls due to the potential for sharp reversals.
