Gold prices steady below record highs as risk assets shrug off US shutdown fears

Gold prices eased on Friday, paring some weekly gains, as strong investor appetite for risk-driven assets, driven by AI optimism and intensified expectations for further U.S. interest rate cuts, dampened safe-haven demand. Markets largely discounted the U.S. government shutdown, instead focusing on weak private labor data which reinforced a 99.3% probability of a 25 basis point Fed rate cut in October, sustaining momentum in global equities.

Analysis

The market is exhibiting a clear preference for risk assets, driven by heightened expectations for Federal Reserve monetary easing and sustained optimism around artificial intelligence. Global equities are advancing, with Wall Street reaching record highs, as investors largely discount the impact of the U.S. government shutdown, citing the limited effect of past occurrences. This risk-on sentiment is directly impacting safe-haven assets, with spot gold retreating 0.3% to $3,847.27 an ounce after hitting a record high of $3,897.20/oz earlier in the week. Despite the daily dip, gold is on track for a 2.2% weekly gain, its seventh consecutive week of increases, underscoring a strong underlying trend supported by rate cut expectations. Market conviction for a 25 basis point rate cut in October is exceptionally high, priced at a 99.3% probability according to CME Fedwatch, following a series of weak private labor market readings. The sharp deterioration in ADP payrolls and ongoing Challenger job cuts are receiving outsized attention due to the shutdown-induced delay of official nonfarm payrolls data. However, a note of caution is warranted, as some Fed officials have questioned the need for further cuts amid 'sticky U.S. inflation', presenting a key risk to the prevailing market narrative.

Key Decisions for Investors

• Given the market's near-certainty of a Fed rate cut, risk assets may continue to find support, but investors should view gold's pullback as a potential consolidation within a strong uptrend, suggesting haven demand could quickly resurface.
• Pay heightened attention to private labor indicators like the ADP report, as they are disproportionately driving market sentiment in the absence of official government data, creating potential for volatility when official figures are eventually released.
• It is critical to monitor upcoming inflation data and any further commentary from Fed officials, as concerns over 'sticky inflation' represent the primary risk that could unravel the market's dovish consensus and trigger a repricing of rate-sensitive assets.