Gold is trading around $4,120 in the early Asian market on Tuesday after a recent high. The increase in gold price follows expectations of a rate cut by the Federal Reserve and a weaker US Dollar.
Reports indicate a 67% likelihood of a 25 basis points rate cut in December, rising to 80% by January, as cited by the CME FedWatch tool. Potential rate cuts may decrease the opportunity cost of holding gold, thereby fostering its appeal.
Us Government Shutdown
Despite the rise in gold prices, the anticipated resolution of the US government shutdown might affect its value. The US Senate has moved forward with a plan to reopen the government, expected to conclude the shutdown by week’s end.
Gold has long served as a store of value. It is seen as a safe-haven and hedge against inflation, often purchased by central banks. In 2022, central banks acquired 1,136 tonnes of gold as a record high purchase.
Gold’s value positively correlates with a weaker US Dollar and low interest rates, yet tends to dip when the stock market rallies. Pricing in US Dollars means gold benefits when the currency weakens.
Given that gold is holding firm above $4,100, the primary focus for us is the upcoming Federal Reserve meeting. We’ve seen this expectation of a rate cut solidify after last week’s Consumer Price Index (CPI) report showed inflation cooling to 2.8% year-over-year, giving the Fed more room to act. This sentiment is reinforced by the latest jobs data, which showed nonfarm payrolls coming in below expectations for the second consecutive month.
Traders Strategies
The high probability of a rate cut is already being priced into the derivatives market, and we are observing a rise in implied volatility for December and January gold options. This suggests the market anticipates a significant price move around the next FOMC announcement. Therefore, simply buying futures may carry unnecessary risk if the Fed delivers a hawkish surprise.
Given this, we see traders favoring bull call spreads on XAU/USD to capitalize on potential upside while capping the premium paid, which is rising due to higher volatility. This defined-risk approach seems prudent, especially as a resolution to the federal shutdown could introduce short-term headwinds by boosting risk appetite. A spread targeting the $4,150-$4,200 range for January expiration could be an effective way to position for a dovish Fed outcome.
Recent Commitment of Traders (COT) reports support this bullish tilt, as we’ve noted a steady increase in net-long positions held by managed money over the past month. This positioning indicates that institutional investors are also preparing for a weaker dollar and lower interest rates heading into early 2026. The increase in open interest in gold futures further confirms new capital is flowing into the market.
Looking back, we saw a similar pattern emerge in mid-2019 when the Fed pivoted from hiking to cutting rates, which preceded a significant multi-month rally in gold prices. Traders who remember that period are likely viewing the current setup as a familiar signal for sustained strength in the precious metal. The key difference today is the much higher starting price for gold, which could lead to more pronounced profit-taking on any signs of Fed hesitation.
