Gold traders are in full celebration mode as the shining metal is well on track to record gains for another month. September has been a fantastic month for traders due to the unexpected rate cut by the Fed. However, the question for gold traders is: what lies ahead as we approach a month known for its significant volatility?
Background
This year, gold prices have been rising sharply. To put things into perspective, the price of the shining metal is up over 28% year-to-date (YTD), and on a year-over-year scale, the price is up over 45%. These jaw-dropping gains are not just eye candy; in fact, the price of the shining metal has made serious gains this month, rising over 4.94%—despite peaking above 5.5% just a few days ago. The three-month performance of the shining metal sits at a robust 13.28%.
Why the Price Has Swollen
One major reason for the significant price increase in the shining metal is the monetary policy of the US Federal Reserve. Traders had been anticipating a rate cut at the beginning of this year, with many expecting a modest 25 basis point reduction. However, the fact that the Fed announced a jumbo interest rate cut this month took market players by storm.
The Fed's action has been widely dubbed a desperate move because one of the critical fundamentals started to head in the wrong direction, forcing the Fed into a corner that many thought they would avoid. I’m primarily referring to the US NFP—the US labor market. However, it’s not entirely accurate to say the Fed acted solely under pressure; inflation data produced readings that allowed the Fed to take such bold action. In essence, inflation moved significantly in a positive direction, while employment readings put the Fed in a tight spot.
What Could Happen Now
With solid gains for the precious metal, traders are left wondering whether they should keep chasing the rally in anticipation of more higher highs. The reality is that the future path of least resistance heavily relies on the Fed's monetary policy. Looking at the latest economic indicators, such as consumer spending and consumer confidence, it appears that the US economy is still under significant stress. This implies that the risks of a hard landing persist, a situation that the Federal Reserve aims to prevent at all costs.
The US NFP data, the most important economic reading for this week, will be crucial for gold traders not only this week but also in setting the tone for the rest of the month. This number will force the Fed to reconsider its monetary policy approach and how aggressively they need to cut interest rates.
Some market players believe that the Fed’s next interest rate cut, dependent on US NFP data, is likely to be another big one. Yes, “jumbo” is the term that’s etched on my trading desk. If the Fed doesn’t deliver on expectations, we could see some steam escaping from the shining metal’s rally. However, if the Fed meets or exceeds expectations, we can anticipate a significant surge in the price of the shining metal.
Gold chart by How To Trade.com
The Bottom Line
As the market continues to dance on the edge, gold traders must keep their eyes peeled for any signs from the Fed. The balance between risk and reward is delicate, and while the gold market is riding high, the winds of change can shift at any moment. In the world of trading, what goes up must come down, so staying alert and ready for whatever the market throws our way is essential for success.