Gold prices reached near $3,882 due to the ongoing US government shutdown and expectations of continued Federal Reserve easing. The ISM Services PMI remained at 50, while S&P Global displayed economic expansion, marking uneven growth. The extended shutdown has led to fiscal uncertainty, prompting traders to bet on dovish positions.

Gold Market Movement

In the North American session, gold rose by 0.70%, trading at $3,882 after a daily low of $3,838. The US economic docket was limited, with mixed PMI figures causing minimal impact on gold movements. The lack of data releases, due to the shutdown, left traders focused on Federal Reserve commentary.

Gold continues to show strength, eyeing a re-test of $3,896. The US Senate plans to vote again, though no current political plans appear likely to succeed. Bullion’s defensive position aligns with the recovery of the Greenback. The US Dollar Index remains flat at 97.77, while Treasury yields move upwards.

Gold correlation with other assets includes an inverse relationship with the US Dollar and treasuries. A weaker Dollar typically increases gold prices. Central banks have added 1,136 tonnes of gold in 2022, signifying its importance as a reserve asset. The price moves in response to geopolitical issues and interest rates, with a strong Dollar often keeping gold prices stable.

The prolonged US government shutdown has left us flying blind, withholding crucial data like the Nonfarm Payrolls. This forces us to trade based on political headlines and Fed commentary rather than concrete economic fundamentals. The market’s reaction to mixed PMI data shows just how sensitive sentiment has become in this information vacuum.

Trading Strategies Amidst Uncertainty

With the market pricing in a 96% chance of a rate cut this month, that expectation is already baked into the current gold price. The real risk, and therefore opportunity for derivative traders, lies in a surprise event, such as a sudden resolution in Washington followed by unexpectedly strong economic data. This makes buying options to hedge or speculate on a sharp move more attractive than holding a simple futures position.

We saw a similar pattern during the 2018-2019 shutdown, when gold rallied over 4% as political uncertainty dragged on. Current implied volatility on gold options has already climbed to a six-month high of 18%, showing that the market is bracing for a significant price swing out of the current tight range. Traders should consider strategies that profit from this expected rise in volatility.

The consolidation between $3,830 and $3,880 is creating pent-up energy, especially with the Relative Strength Index indicator flattening in overbought territory. This coiling price action suggests a breakout is imminent once Washington reaches a deal and delayed data is released. Long straddles or strangles could be an effective way to play this impending move without betting on the specific direction.

While the shutdown provides a tailwind for gold, the flat dollar and slightly rising real yields are acting as a headwind, keeping prices just below the record high. However, underlying support remains strong, as recent data from the World Gold Council confirms central banks continued their record-breaking purchases from past years, adding another 45 tonnes to global reserves last month. This consistent demand should limit any significant downside.

For the coming weeks, the primary trade is on volatility itself, not a clear direction. Once the shutdown ends, the delayed release of key jobs data will likely trigger the breakout from the current range, either sharply up or down. We should therefore be positioned for a spike in volatility rather than a slow grind higher.

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