Insights 
VT 
Fed comments and US-China tensions contributed to a favourable environment for gold prices this week. Fed Chair Jay Powell’s speech suggested concerns about labour market risks outweighing inflation concerns.
New FOMC member Stephen Miran, aligned with former President Trump, advocated for a 50 basis point interest rate cut. He mentioned the possibility of two more rate cuts within the year, aligning with market expectations.
Interest Rate Expectations
Interest rate expectations for next year have decreased since last week. Fed Funds Future for end of 2026 suggests rates may be 20 basis points lower, implying just over five rate reductions from current levels.
The renewed US-China conflict is considered a threat to the global economy. Additionally, worries about regional banks in the United States contribute to market uncertainties.
The environment for gold looks favorable as Fed Chair Powell signals a pivot towards protecting the labor market, even with inflation still above target. This dovish stance, supported by other key Fed officials, suggests interest rate cuts are on the horizon. For us, this is a clear signal that the cost of holding a non-yielding asset like gold is set to decline, increasing its appeal.
This sentiment is backed by recent data, with last week’s initial jobless claims ticking up to 245,000, a three-month high. While the latest Core PCE reading of 2.9% remains above target, the clear deceleration in price pressures gives the Fed cover to prioritize employment. This combination strengthens the market’s expectation for a 50 basis point cut in the near future.
Derivative Trading Opportunities
For derivative traders, this outlook supports buying call options on gold futures or gold-backed ETFs. This approach provides leveraged exposure to a potential price increase while defining risk. We believe positioning for a move higher in the coming weeks is a prudent response to the Fed’s clear signaling.
Adding to this bullish case are the renewed trade tensions between the US and China, which are stoking fears of an economic slowdown. We are also seeing renewed stress in some US regional bank stocks, which brings back memories of the turmoil from 2023. These factors create a risk-off environment that has historically served as a strong tailwind for gold prices.
We have seen this playbook before, looking back at the Fed’s pivot in 2019 when similar global growth concerns prompted rate cuts that fueled a gold rally. That period showed how quickly a shift in Fed language can translate into significant upward momentum for precious metals. The Fed Funds Futures market is now pricing in over five 25 basis point cuts by the end of 2026, indicating this is not a short-term expectation.
Given the dual threats of economic risk and central bank easing, traders should also consider strategies that benefit from rising volatility. Buying straddles or strangles on gold could be an effective way to position for a significant price move, regardless of the initial direction, as uncertainty grows. We see implied volatility in gold options as potentially underpriced given the confluence of risk factors.
