Either Gold or the Market 'Wrong' About Fed Rate Forecasts

GOLD PRICES rallied hard on Wednesday, reversing most of this week's previous $100 plunge as crude oil dropped and government bond yields eased back from multi-decade records ahead of the US Federal Reserve's September decision on Dollar interest rates, almost universally expected to raise rates for the first time since July 2023.

Former Fed chair Jerome Powell then led the FOMC policy committee to make 6 rate cuts by December 2025, but was repeatedly attacked by returning US President Trump for not cutting faster or further.

The Fed under Powell's successor Kevin Warsh − nominated by Trump the day that bullion this January touched gold's current all-time high near $5600 per troy ounce − now shows a 93% likelihood of raising today, according to trading in Fed Funds futures tracked by derivatives exchange the CME's FedWatch tool.

Market consensus then forecasts another 25 basis points rise by year-end.

"Gold is saying the Fed should hike once within 6 months; broader market is saying it should hike twice," says a note from precious metals strategist Nicky Shiels at Swiss bullion refining and finance group MKS Pamp, showing a model of gold prices against Fed rate expectations which suggests the metal is either over-priced or the interest-rate market is wrong.

Either way, "Real policy rates are barely positive against 3.7% [inflation]" on the PCE measure currently favoured by the Fed, says Shiels. "The hiking cycle isn't restrictive, it's catching up."

Inflation in July however held near 5-year lows of 2.3% per annum on the Trimmed Mean PCE which Warsh prefers. But like overnight rate expectations, long-term borrowing costs have leapt in the bond market, closing last night at 5.00% per annum on Washington's 10-year Treasury bond for the first time since 19 July 2007.

That was barely 3 weeks before a global credit crunch warned of the financial crisis to come.

"[While] a more hawkish interest rate outlook has weighed on investor interest," says specialist consultancy Metals Focus, "healthy buying by central banks during July-August has provided important support to gold prices."

That comment echoes other analysts noting the battle between short-term pressure from interest rate expectations versus geopolitical drivers for gold.

Having dropped to 5-week lows Monday at $4254 per ounce, gold priced in the Dollar today peaked at $4360 even as the US currency rose yet again on the FX market amid strong US retail sales figures, before dropping back $25.

Gold in Euros peaked 2.4% above Monday's low, touching €3779, while the UK gold price in Pounds per ounce rose near £3240 ahead of Thursday's Bank of England rates decision before dropping back £15.

Silver also surged and slipped, peaking at $64.93 per troy ounce − more than 4.1% higher than Monday's 5-week low − before retreating by 60 cents.

US equities rallied from last night's 7-week low on the S&P500 index, and US copper prices rose further from Monday's 7-week low, while Brent crude slipped 1.3% but held above $100 per barrel.