Gold prices turned lower for the second consecutive day, despite a temporary rise above $4,100. The mixed economic environment contributes to this decline as positive US-China trade developments encourage a shift towards riskier assets. Easing trade tensions between these two major economies have reduced demand for gold, a traditional safe haven.

Federal Reserve’s Stance Supports Gold

Concurrently, the Federal Reserve’s dovish stance supports gold prices due to weaker US consumer inflation figures, which suggests further rate cuts. The market anticipates the US central bank may cut borrowing costs twice more by the year-end. This expectation puts US Dollar bulls on the defensive, countering bearish pressures on gold.

On the geopolitical front, gold finds support amidst ongoing tensions like the Russia-Ukraine war. Ukraine’s Air Force recently countered a drone attack from Russia. Additionally, concerns arise from Russia’s successful new missile test. Meanwhile, the upcoming Federal Reserve meeting is a key event that could influence USD and gold’s next moves.

Technically, gold struggles to maintain support, reflected in a slip below the 23.6% Fibonacci retracement level. However, price stability near the $4,000 mark suggests caution for bearish players. Key levels include a break below $3,044 indicating possible buying, while breaking $4,110 could trigger upward momentum.

We are seeing a tug-of-war in the gold market, with prices hovering above $4,100 an ounce as optimism over US-China trade talks clashes with expectations of a dovish Federal Reserve. This tension is keeping the VIX, a measure of stock market volatility, relatively subdued around 19, but this could change rapidly. For derivative traders, this environment suggests that positioning for a breakout, rather than a clear direction, may be the prudent approach in the coming weeks.

Upcoming FOMC Meeting

The upcoming FOMC meeting is the most significant event on the calendar, though a 25-basis-point rate cut is already almost fully priced in, with the CME FedWatch tool showing a 98% probability. The real market-mover will be the Fed’s forward guidance, especially with inflation persisting at 3%, a level that is still well above the central bank’s target and reminiscent of the stubborn inflation we saw back in 2023. Any hint that the Fed might pause its cutting cycle after this meeting would trigger significant repricing in interest rate futures and the dollar.

The positive developments in US-China trade talks are currently driving risk appetite, but we’ve seen this pattern before during the 2018-2020 trade war, where sentiment could reverse on a single headline. We’ve already seen November soybean futures rally over 8% this past month on hopes of a deal being reached at the upcoming ASEAN summit. Derivative traders should be wary of this optimism and consider hedging long equity positions, as the potential for disappointment remains high given the aggressive 60% tariff stance taken earlier this year.

For gold options specifically, the battle around the $4,100 level is creating a buildup of open interest at the $4,000 puts and $4,200 calls for November and December expirations. This suggests the market is bracing for a decisive move past this range following the FOMC announcement. A strategy like a long strangle, which involves buying both an out-of-the-money call and put, could be effective for traders who expect a spike in volatility but are uncertain of the direction.

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