Gold’s price extended its rally to surpass $4,200, driven by geopolitical risks, US-China trade tensions, and the ongoing US government shutdown. It is supported by expectations of a dovish Federal Reserve, which pressures the US Dollar, benefiting the non-yielding metal.
The US central bank is expected to lower rates twice by the end of the year, applying further pressure on the Dollar. Despite overbought conditions, gold’s momentum remains upward, supported by escalating trade conflicts, particularly between the US and China.
International Monetary Fund Forecast
The International Monetary Fund forecasted a 3.2% global growth for 2025, stating that a US-China trade war escalation could impact output. As the US shutdown continues with no resolution, safe-haven flows toward gold are increasing, keeping prices at record highs.
Traders foresee a 25-basis-point rate cut in October, with a high chance of another in December, which adds pressure on the Dollar and supports gold. Any short-term drop in gold could be a buying opportunity, likely finding support around the $4,060-4,055 region. However, a break below this might signal potential losses.
The US Dollar showed mixed performance against major currencies, being strongest against the New Zealand Dollar and weaker against others like the Euro and Canadian Dollar.
Given gold’s powerful move past $4,200, the primary strategy should be to stay with the trend, but with caution. The extremely overbought RSI reading suggests a long futures position is risky, so we should consider buying call options to cap potential losses while retaining upside exposure. This allows us to participate in further gains driven by the ongoing government shutdown and geopolitical stress.
Gold Market Shift
This rally dwarfs what we saw in the past, such as the 2024 peak around $2,430, indicating a new paradigm for the metal. The market is convinced the Federal Reserve has fully pivoted from the aggressive hiking cycle of 2022-2023, with rate cuts now seen as a certainty. This fundamental shift away from a strong dollar policy provides a powerful tailwind for gold.
Recent statistics confirm this bullish sentiment, as we have seen net inflows into major gold ETFs like GLD accelerate significantly since the shutdown began on October 1st. The latest data from the CFTC also shows that speculative net long positions are at their highest level in over a year. This confirms that major funds are betting on continued strength, but also warns that the trade is becoming crowded.
Traders should watch the $4,100 level closely for any pullback. A dip to this area could be an opportunity to initiate new long positions or add to existing ones. To hedge against a sharp reversal from these overbought levels, buying out-of-the-money put options can provide cheap insurance for an existing long portfolio.
The persistent weakness in the US Dollar is a key part of this trade, and it is not isolated to gold. With the FedWatch tool pricing in two more rate cuts by year-end, derivative traders can also look at shorting the US Dollar Index (DXY) futures. Alternatively, buying call options on pairs like the EUR/USD or GBP/USD provides another way to capitalize on the dovish Fed expectations.
This US government shutdown is now extending into its third week, drawing comparisons to the 35-day closure we witnessed back in late 2018, which caused significant market disruption. As long as Washington remains deadlocked and trade tensions with China simmer, any significant dips in gold are likely to be bought aggressively. Implied volatility in gold options has risen sharply, suggesting the market expects these large price swings to continue.
