Gold prices increased during the North American session but remained below the record high of $4,179. The price was recorded at $4,140 as traders processed Federal Reserve Chair Jerome Powell’s comments. Powell mentioned the economy might be on a firmer trajectory but maintained a cautious approach on interest rates.

The probability of a 25-basis-point rate cut at the meeting on October 29 was at 96%. Geopolitical tensions, including the US-China trade war and a US government shutdown extending for fourteen days, also influenced the market. President Trump threatened increased tariffs on Chinese goods, while China imposed rare-earth export controls.

Inflation and Market Dynamics

Powell noted that inflation has increased due to rising tariffs rather than overarching inflationary trends. The US Dollar’s slight depreciation and declining Treasury yields correlated inversely with gold prices, contributing to its appeal. The National Federation of Independent Business reported decreased small business sentiment with a 2-point drop in their Optimism Index.

Gold’s price is expected to remain bullish, with resistance levels at $4,200. A close below $4,150 could prompt a pullback. Central banks are large holders of gold, purchasing 1,136 tonnes in 2022. Gold’s value tends to rise inversely to the US Dollar and Treasury yields, often used as a safe-haven asset.

With a 96% probability of a rate cut priced in for the October 29th meeting, the path of least resistance for gold is upward. We see the Fed’s accommodating tone as a clear signal for traders to maintain a bullish bias. Derivative strategies should be positioned for a potential test of the $4,200 resistance level in the near term.

This market setup is very similar to the dynamic we saw back in late 2023 when the Fed first signaled an end to its hiking cycle, which subsequently fueled a major gold rally into 2024. That historical precedent suggests that as we approach the first official rate cut, buying momentum could accelerate significantly. These conditions favor holding bullish positions until the Fed gives a reason to think otherwise.

Risk Management and Geopolitical Factors

Given the high geopolitical and domestic uncertainty, buying call options is a direct way to capture further upside while clearly defining risk. The NFIB Uncertainty Index is at 100, one of its highest readings in over 50 years, which likely means option premiums are elevated. Therefore, using bull call spreads could be a more cost-effective strategy to gain long exposure.

The ongoing government shutdown and escalating trade tensions with China provide a strong underlying bid for gold. We saw a similar flight to safety during the extended government shutdown in late 2018 and early 2019, which helped push gold prices higher. This pattern, combined with the weak U.S. Dollar Index now trading at 99.00, creates a highly supportive environment for bullion.

We cannot ignore the immense and persistent demand from central banks, which has provided a solid floor for prices. Following record purchases where central banks added over 1,000 tonnes in both 2022 and 2023, this trend has shown no signs of slowing. This institutional demand helps absorb any dips and adds a layer of stability to the market.

The primary risk to this bullish outlook is the Consumer Price Index (CPI) report scheduled for October 24. A surprisingly hot inflation reading could force the Fed to reconsider its dovish stance, which would likely trigger a sharp pullback toward the $4,100 support level. Traders should be prepared for heightened volatility around that data release.

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