Gold prices could rally a little on a Fed hike, but a lot on a hold, with $5,000/oz back on the table – Jesse Columbo

If the Federal Reserve hikes interest rates by 25 basis points as expected on Wednesday afternoon, gold could still see a mild relief rally on the removal of lingering uncertainty. But if the central bank ignores market expectations and votes to hold rates steady, gold prices could surge higher as they begin a march back to $5000, according to Jesse Colombo, independent precious metals analyst and founder of the BubbleBubble Report.

Columbo said investors were overly bearish last week in the runup to Friday’s August CPI release, and gold paid the price. “They were bracing for a very hot CPI number, and I think they went overboard with selling gold,” he said. “It came in a little hotter than expected – not as hot as it could be – but I think investors were too pessimistic going to the CPI report. Not that I blame them, of course, because you just don't know how it's going to play out. But there was an excessive amount of pessimism, and gold immediately had a sigh of relief. Then what happened was it became overbought pretty quickly, and oftentimes when that happens, it'll take a breather, which is what we saw in the ensuing few hours.”

Columbo also pointed out that spot gold bumped up against the $4,400 per ounce resistance level when it rallied following the CPI release. “$4,400 has played such a key role over the past year, a key support earlier this year, from February and late March,” he said. “Then it finally broke through in June, but that was a major support and resistance level the whole year, and it still continues to be very psychologically important. There was also a false breakdown on the daily chart where it briefly broke below $4,300, but it didn't stay below there. That's a good sign.”

Asked how he would be positioning himself in gold ahead of Wednesday’s Fed decision, Columbo said he’d advise caution, but he’s optimistic about gold’s prospects coming out of the meeting. “In general, I don't like to place bets ahead of major binary events like this,” he said. “I don't believe I have an edge in that regard. But I suspect that there's going to be a ‘buy the news’ rally, a relief rally,” he said. “Especially after [Friday’s] CPI, these rate hike expectations will not come as a surprise to the market – this has already been well telegraphed going on for months – so a big part of me just believes that we should rip the Band-Aid off and get it behind us. There's so much speculation about, ‘is there going to be a rate hike or not?’”

Columbo agreed that even though much of the current inflation is being driven by a supply shock – high energy prices due to the Iran war – there are other major drivers too, and sooner or later the Fed must react regardless. “Over time, it does become digested into the CPI, but it's not necessarily monetarily driven,” he said. “That's why monetary policy is of limited use to address that. There's another factor too, which is AI-driven inflation, where you have hyperscalers spending trillions of dollars, and they're driving inflation in chips and computer parts and electronics and building materials to build these data centers. That is also a major force behind inflation, and that is something that monetary policy can address.”

Columbo said the current data center boom reminds him of the housing market 20 years ago. “During the housing bubble, [there was] massive amounts of home building, and it drove up copper and it drove up all different types of basic materials and ultimately found its way into inflation numbers,” he said. “Then the Fed raised rates, and that took away the punch bowl from the party. So that is a type of inflation that can be addressed by monetary policy.”

Coming out of the FOMC, Columbo said he expects gold to rally a little if the Fed hikes, and a lot more i...