Clouds of a U.S. government shutdown boost risk-aversion sentiment; spot gold breaks through the $3,800 mark, silver hits a fourteen-year high.

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Under the shadow of a possible U.S. federal government shutdown, investors are facing growing uncertainty over the Federal Reserve's monetary policy path and are flocking to precious metals for safety. This pushed gold prices to a new record high on Monday, with spot silver also rising.

On Monday during the Asian session, spot gold rose 1.19%, hitting a record high of $3,805.88 per ounce, marking its sixth consecutive weekly gain. U.S. December gold futures also rose 0.6% to $3,831.90.

Spot silver rose more than 2% intraday, reaching $47 per ounce, marking a new high since May 2011. The U.S. dollar index weakened by 0.2%, making dollar-denominated gold more attractive to overseas buyers.

The immediate catalyst for this surge is the looming political deadlock in Washington. If the White House and Congressional Democrats fail to reach agreement on a short-term spending bill by Tuesday's deadline, the U.S. government will face a shutdown. This could delay this week’s crucial nonfarm payrolls report, leaving both markets and the Federal Reserve without key indicators needed to assess the health of the economy.

For investors, this means the Fed’s decision at its October policy meeting will be even more clouded. The market generally expects that weak employment data will give the Fed more reason to cut rates, which would lower the opportunity cost of holding non-yielding assets like gold. In a climate of economic and policy uncertainty, gold's safe haven value is once again in the spotlight.

Fed rate cut expectations heating up

Beyond government shutdown risks, recent data and analysis are also strengthening market expectations for further Fed monetary easing. Last Friday, the U.S. Commerce Department’s Personal Consumption Expenditures (PCE) price index met expectations—this Fed-preferred inflation indicator showed inflation remains steady. The Sucden Financial research team stated in a commentary that this data reinforced market expectations that the Fed will continue to ease policy.

Kyle Rodda, an analyst at Capital.com, said:

"Mild U.S. inflation data gives markets reason to believe the Fed will further cut rates in October and December."

This expectation is directly reflected in the futures markets. According to CME's FedWatch tool, traders now estimate a 90% chance of a Fed rate cut in October, and about a 65% chance of another cut in December.

However, some analysts are also signaling risks. Kyle Rodda added:

"Market sentiment is extremely bullish, and gold is currently at a very long position, which may be a reason for caution about the potential for further upside."

Investors are closely watching upcoming U.S. data releases this week, including job openings, private sector employment, ISM manufacturing index, and the nonfarm payrolls report (if released on time), for further clues about the health of the economy.

Aside from economic data and the interest rate outlook, the Fed's own independence is also becoming a new variable for investor consideration. Last Thursday, the lawyer for Fed Governor Lisa Cook requested Supreme Court intervention to block Trump’s attempt to remove her from office. This event made the market start to weigh the risk of erosion of central bank independence.

Barclays strategists Themistoklis Fiotakis and Lefteris Farmakis noted in an analysis on Sunday that compared to the dollar and U.S. Treasuries, gold does not appear to be overvalued. They wrote that, considering the "risk of central bank independence being undermined," these markets "should include a certain degree of risk premium related to the Fed". Therefore, they view gold as "a surprisingly good hedging tool."

Fund inflows support sustained gold price rally

So far this year, gold has performed exceptionally strongly. With robust demand from global central banks and the onset of a Fed rate-cutting cycle, gold prices have risen more than 40% for the year, and are set for a third straight quarterly gain.

Funds continue to flow into gold-linked investment products. According to SPDR Gold Trust, the world’s largest gold ETF, holdings increased by 0.89% last Friday to 1,005.72 metric tons, the highest level since 2022. This wave of inflows has spread to other precious metals as well. Silver rose more than 2% on Monday, once touching $47.08 per ounce; platinum and palladium also surged sharply.

Looking ahead, several investment banks, including Goldman Sachs and Deutsche Bank, expect the gold rally to continue. With multiple positive factors at play, gold appears to be entering a new era of pricing, and the market's attention will remain focused on political developments in Washington and the Fed’s next moves.

Risk warning and disclaimerThe market has risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, viewpoints, or conclusions herein fit their particular situation. You are responsible for investment decisions made accordingly. ```