Gold shrugs off Fed rate hike as deeper forces drive safe-haven demand

A lot more appears to be going on in the gold market than monetary policy alone can explain, as prices continue to hold critical support heading into the weekend, even after the Federal Reserve raised interest rates and signaled further tightening by year-end. Analysts note that gold’s resilience is particularly notable given the traditional headwinds facing the precious metal.

The Federal Reserve raised the federal funds rate by 25 basis points on Wednesday, while Fed Chair Kevin Warsh maintained a hawkish tone as the central bank continues its fight against persistent inflation. At the same time, U.S. bond yields remain elevated, with the 10-year Treasury yield hovering near the psychologically important 5% level. Yet instead of breaking down, gold has managed to hold its ground. Spot gold last traded at $4,386 an ounce, up nearly 1% on the week and on track to snap a three-week losing streak.

Analysts have said that the reason behind gold’s resilience is relatively simple: investors are increasingly looking beyond incremental changes in interest rates and focusing on the much larger structural forces supporting it, including deteriorating government finances, persistent inflation, geopolitical uncertainty and changing global reserve allocations.

Fed rate hikes aren't the whole story

Chris Vecchio, head of futures and forex strategy at Tastylive, said gold is ending the week on solid footing because investors are looking beyond the Federal Reserve’s latest 25-basis-point rate hike. Although the central bank raised rates and signaled that further tightening is likely, Vecchio noted that its updated economic projections point to a shallower and slower hiking cycle than markets had previously priced in. The Fed’s projected year-end rate of 4.1% suggests only modest additional tightening following September’s move, rather than the more aggressive hiking cycle investors had feared.

At the same time, Vecchio said the factors that have driven gold higher despite rising bond yields remain firmly in place. He pointed to concerns about U.S. fiscal stability, deteriorating government finances, weaker marginal demand for U.S. government debt and reduced demand for U.S. dollars as global trade becomes increasingly fragmented. These factors are all working to support gold, even as they push bond yields higher.

In a recent interview with Kitco News, Jeff Sarti, CEO of Morton Wealth, said that the Federal Reserve’s latest move is secondary to the bigger forces driving gold. He pointed out that the Federal Reserve is operating within a fiscal landscape dominated by persistent government spending and large deficits. In his view, monetary policy is increasingly “backed into a corner,” leaving the bond market to ultimately determine how sustainable the current fiscal trajectory is.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said gold’s price action following Wednesday’s rate decision suggests that the Federal Reserve’s monetary policy is largely priced into the market. “Heading into the weekend, gold appears to have shrugged off the US rate hike,” Hansen said.

With no surprises from the central bank, Hansen said that he is paying attention to renewed investment demand. He pointed out that holdings in gold-backed exchange-traded funds have climbed to a seven-month high despite the precious metal’s recent price weakness. “This highlights a market where demand from less interest-rate-sensitive investors remains firm, even with yields still elevated,” Hansen said.

Hansen compared the current environment to 2022 and 2023, when aggressive Federal Reserve rate hikes and rising bond yields failed to generate the kind of sustained weakness in gold that would traditionally have been expected. “Then, as now, underlying demand from investors is less sensitive to interest rates and yields provided an important...