Fed Rate Hikes Can't Stop Gold's Counterattack; The Underlying Logic Of Gold Depends On Shifts Between Oil Prices And Fed Expectations!
After spot gold reached near the $4,400 mark, upward momentum faded, and expectations of hawkish Federal Reserve policies led to strong buying for the dollar. Meanwhile, oil prices rebounded and US Treasury yields rose, further putting pressure on gold.
The gold market was volatile, with the Federal Reserve raising rates by 25 basis points last Wednesday, bringing rates up to the 3.75%-4.00% range—the first rate hike since 2023. The decision pushed the dollar and U.S. Treasury yields higher, with gold once falling to $4,235, hitting a new low in over a month. The US Dollar Index, which measures the dollar's movement against six major currencies, is currently trading near 100.40, near a seven-week high. However, the downward pressure on gold prices from the Fed decision has been partially offset by a drop in oil prices. Reports indicate that Saudi Arabia is adjusting some crude oil export routes and repairing the east-west oil pipeline damaged last week. This pipeline allows Saudi crude oil to bypass the Strait of Hormuz and be transported directly to the Red Sea.
The Fed has sent a signal that policymakers will work to bring inflation back to the 2% target, with further rate hikes likely in the future. The updated dot plot shows that 16 out of 18 Fed officials expect at least one more rate hike this year. The median policy rate forecast for 2026 and 2027 is both 4.1%, meaning officials are not expected to cut rates next year.
Rising borrowing costs will increase the opportunity cost of holding non-interest-bearing assets like gold. Current market trading expectations show about a 55% chance of another rate hike at the October meeting. Meanwhile, inflation risks from energy remain a major market concern, with restricted shipping in the Strait of Hormuz offsetting the positive benefits from the recovery in Saudi crude oil supply.
These risks have kept Treasury yields elevated, with previous declines being very limited. The benchmark 10-year Treasury yield was about 5.00%, up more than 1% intraday, not far from the previous 2007 high of $5.04. This week's U.S. economic data calendar is relatively light, but several Fed officials are set to make public statements that will provide new clues about whether to raise rates again in October.
Market Insight:
The overall environment is full of challenges for gold. For gold prices to rebound strongly, oil prices need to fall further, US Treasury yields to fall, or a shift in market expectations for Fed rate hikes. However, continued gold purchases by central banks, strong investment demand, and sustained inflows of gold ETF funds will provide long-term support for gold prices.
