Gold prices rose, nearing a three-week high due to concerns over US economic momentum and expectations of rate cuts by the Federal Reserve. The weaker US Dollar, influenced by Federal Reserve expectations and the ongoing US government issues, supports gold’s rise.
Gold (XAU/USD) saw increased demand in Europe on Wednesday, building from levels below $4,100. Despite a positive outlook for reopening the US government, gold remains attractive amid weak economic indicators, stabilising around its higher trajectory.
Economic Impact of Government Shutdown
Economists predict that the prolonged US government shutdown may have reduced GDP growth by approximately 1.5 to 2.0%. Employment data showed 9,100 job losses in October, and government payrolls decreased by 22,200, reflecting a weak labour market.
Technically, the XAU/USD pair presents a mixed outlook, with positive oscillators suggesting potential further gains. However, failure to surpass key resistance levels like $4,150 could trigger bearish sentiment, pushing prices towards lower support levels around $4,025.
The Federal Reserve’s monetary policy, primarily through interest rate changes, affects gold prices and the US Dollar. Lower interest rates tend to weigh on the Dollar, while Quantitative Easing (QE) weakens it further by increasing credit supply and bond purchases. Quantitative Tightening (QT) is the reverse process, typically strengthening the Dollar.
With gold attracting buyers, we believe derivative traders should consider positions that benefit from further upside, especially with the market betting on a Federal Reserve rate cut. The primary driver is the concern over weakening US economic momentum, which is now coming into focus after the prolonged government shutdown. This environment makes holding non-yielding gold more attractive.
The economic damage from the shutdown appears significant, with estimates suggesting a hit of 1.5% to 2.0% to quarterly GDP. For perspective, the 35-day shutdown we saw back in 2018-2019 was estimated by the CBO to have reduced GDP by only about 0.2%, highlighting the severity of the current situation. This reinforces expectations that the Fed will act to support the economy.
Strategies for Capitalizing on Gold’s Momentum
Given this backdrop, buying call options with strike prices targeting the $4,200 resistance level could be a viable strategy for the coming weeks. Traders might consider expirations in early 2026 to allow time for the expected upward move to materialize. This approach offers a leveraged bet on gold’s continued climb as economic data is released.
However, the positive risk sentiment following the government’s reopening is a headwind that could cap immediate gains. To manage this uncertainty, a bull call spread could be a more prudent strategy than an outright long call. This would involve buying a call at a lower strike price and selling one at a higher strike, limiting the upfront cost and potential loss.
The market’s expectation for a dovish Fed pivot is reminiscent of the sentiment we saw in late 2023, which preceded a period of dollar weakness and precious metal strength. For those with a moderately bullish view, selling out-of-the-money put options with strike prices near the $4,000 psychological support level is another way to play this. This strategy allows traders to collect premium, profiting if gold stays above that key level.
We should keep a close eye on the $4,155 resistance zone, as a sustained move above it would confirm bullish momentum and likely trigger further buying. Conversely, a convincing break below the $4,075 support level would be our signal that the upward trend is faltering. This could be a trigger to exit bullish positions or initiate short-term protective hedges.
