Gold stabilised as traders anticipate the Federal Reserve’s (Fed) decision, recovering from a three-week low of $3,886. Trading at $3,998, Gold snapped a streak of three consecutive losses. The absence of key data due to a US government shutdown has led to expectations of the Fed reducing borrowing costs, with the latest Consumer Price Index (CPI) not hindering such moves.

Expectations for Fed’s Decision

There are expectations for a 25-basis-point cut in interest rates, possibly followed by another in December. Traders are focused on Fed Chair Jerome Powell’s comments, with potential impacts on Gold prices. If Powell leans hawkish, Gold could drop, challenging this week’s low, otherwise recovering to $4,000 is possible.

South Korea’s central bank is contemplating increasing Gold reserves long-term. Meanwhile, the US Dollar Index and 10-year Treasury yields remained steady, with US real yields rising slightly. Central banks added 1,136 tonnes of Gold in 2022, the largest annual purchase recorded. Geopolitical instability and recession fears can spike Gold prices due to its safe-haven status. Gold’s movement closely ties to the US Dollar, benefiting from a weaker Dollar and dropping when it strengthens.

Given the Federal Reserve’s expected rate cut, we see the current pause in gold as a positioning opportunity for the weeks ahead. This dovish pivot is the culmination of a trend we saw beginning back in late 2023 and early 2024, as the pressure from a US national debt that surpassed $34 trillion made sustained high rates difficult. Therefore, traders should view any dip below $4,000 as a potential entry point for bullish strategies.

The rally to these levels near $4,000 per ounce builds on a multi-year foundation of strong central bank demand. We saw this trend accelerate dramatically in 2022 and 2023, when central banks, led by emerging economies, purchased over 1,000 tonnes of gold annually according to World Gold Council data. The recent news of South Korea considering boosting its reserves for the first time since 2013 suggests this powerful buying trend is not yet over.

Strategies for Traders

For derivative traders, this environment favors strategies that capitalize on upward momentum while managing the risk of a hawkish surprise from the Fed. Buying call options on XAU/USD or gold futures with strike prices just above $4,000 offers a defined-risk way to play a potential breakout towards the $4,075 target. Conversely, purchasing cheap, short-dated put options could serve as a hedge against any unexpectedly firm language from Fed Chair Jerome Powell.

We need to see a daily close above the crucial $4,000 psychological level to confirm that bullish momentum is taking hold once again. The Relative Strength Index shows buyers are gathering strength, suggesting further upside is likely in the near term. If XAU/USD can clear the 20-day moving average at $4,075, the path to the October 22nd peak of $4,161 opens up.

The ongoing government shutdown introduces a wildcard that ultimately favors gold by creating economic uncertainty and depriving the Fed of key data. This lack of clear inflation and employment figures forces the central bank to act more cautiously, reinforcing the case for a rate cut. We should interpret this data vacuum as a bullish factor for gold, as it increases its appeal as a safe-haven asset in turbulent times.

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