Insights 
VT 
Economic Concerns Mounting
Gold’s price remains steady, staying above $3,850, partially due to uncertainty over the US government shutdown and expectations of Federal Reserve rate cuts. Gold traded around $3,875 on Friday, rising from an intraday low of approximately $3,838, as the US Dollar weakened slightly.
The demand for Gold as a safe-haven persists amid the ongoing US government shutdown and impending Federal Reserve decisions. The ISM Services PMI, marking economic activity, decreased to 50.0 in September from 52.0 in August, signalling a cooling economic climate.
Economic activity showed further dips with the New Orders Index decreasing to 50.4 from 56.0 and the Employment Index persisted in contraction at 47.2. In contrast, the S&P Global Services PMI marginally dropped to 54.2 in September, indicating moderate expansion.
Concerns over the US economy mounting, as a governmental impasse could cost $15 billion in GDP weekly with thousands potentially losing employment. Additionally, disruptions in data releases would complicate Federal Reserve policy decisions amid the delayed Nonfarm Payroll report and potential postponement of the Consumer Price Index.
Technical indicators for Gold show a current stabilisation with dip-buying interest at the $3,860-$3,865 range. A breach below key resistance zones could result in deeper corrective trends, although upward momentum remains possible.
Federal Reserve Uncertainty
Given the ongoing US government shutdown and softening economic data, we are seeing a clear flight to safety. Gold is holding firm near record highs, supported by expectations of a Federal Reserve rate cut later this month. The recent ISM Services PMI dropping to 50.0 signals economic stagnation, reinforcing this cautious sentiment.
The political gridlock in Washington complicates the Federal Reserve’s next move by delaying crucial data like the Nonfarm Payrolls report. This uncertainty is increasing bets on a rate cut, with futures markets now pricing in over a 70% probability of a 25-basis-point reduction at the October 28-29 meeting. This environment is likely to keep the US Dollar under pressure, providing further support for gold.
We can look back at the 35-day shutdown of 2018-2019, which trimmed an estimated 0.2% from quarterly GDP, to understand the potential economic drag. The current shutdown could have a similar or greater impact, weakening the case for the Fed to hold rates steady. This historical precedent suggests that the longer the shutdown continues, the greater the downside risk to the economy and risk assets.
In the coming weeks, derivative traders should anticipate higher market volatility. The CBOE Volatility Index (VIX) has already climbed above 20, reflecting rising investor anxiety similar to levels seen during previous debt ceiling crises. Buying call options on the VIX or put options on equity index ETFs like SPY could serve as effective hedges against a potential market downturn.
For direct exposure to the bullish gold narrative, traders could consider call options on gold futures or the GLD ETF. This strategy allows for participation in potential upside as gold challenges its all-time high near $3,896, while also defining risk in case of a sharp reversal. The persistent dip-buying interest noted around the $3,820 level suggests a solid floor of support for now.
The weakening outlook for the US Dollar also presents opportunities in the currency markets. With the Dollar Index (DXY) trading weakly around 97.81, purchasing put options on the dollar or call options on safe-haven currencies like the Swiss Franc could be a prudent move. This strategy aligns with the broader theme of risk aversion and a more dovish Federal Reserve.
