Has gold overreacted to the threat?

Has gold overreacted to the threat?

• Fed rate rises will not necessarily put pressure on gold.
• The medium-term outlook for gold remains bullish.

Ahead of the FOMC meeting, gold is rising sharply, gaining more than 1.2% intraday to $4,345. Over the past three weeks, the strengthening of the dollar and rising yields on US Treasury bonds have weighed on the price of the non-interest-bearing precious metal. However, as soon as the greenback retreated, gold quickly launched a counter-attack.

A rise in the federal funds rate from 3.75% to 4% appears a foregone conclusion. The base-case scenario for the interest rate futures market is a tightening of monetary policy and the FOMC’s forecast that it is prepared to do so again in 2026. This will stabilise the US dollar and is likely to suppress yields on long-term government bonds as fears subside that the Fed is losing control of the situation in the long term. Such a scenario is quite favourable for gold. If, however, the Committee forecasts three rate rises in its updated projections, the greenback will soar, whilst the precious metal will face a wave of sell-offs.

Former Fed Chair Jerome Powell was adept at smoothing out market sentiment regarding the FOMC’s forecasts. Will Kevin Warsh, an opponent of forward guidance, be able to do the same? His hawkish rhetoric following the June meeting and at Jackson Hole significantly strengthened the US dollar and triggered a decline in gold prices at the end of last month. Gold bulls have cause for concern this time around as well.

At the same time, the medium- and long-term outlook for the precious metal looks positive. A rate hike is sure to provoke discontent in the White House, whose pressure on the Fed is fuelling the ‘debasement trade’. US fiscal problems have not gone away, and the Treasury’s attempts to intervene in the currency and debt markets are increasing demand for decentralised finance assets.

In such circumstances, a fall in gold prices in response to the Fed’s decision to begin a cycle of rate rises could create ideal conditions for buying the metal.

The FxPro Analyst Team