Gold Defies Higher Interest Rates as Central Banks Tighten Monetary Policies

The global monetary regime has shifted towards higher interest rates, and gold is behaving as if this change carries little cost. The Federal Reserve raised its federal funds target range to 3.75% to 4.00% by 25 basis points on September 16, marking the first hike in over three years. This decision was accompanied by a clearly restrictive policy message, with sixteen of eighteen policymakers projecting at least one additional increase before the end of 2026.

Other central banks are also tightening their monetary policies, including the European Central Bank, Australia, New Zealand, and the Bank of Japan, which increased its policy rate to 1.25%, the highest level in 31 years on September 18. The market is pricing additional tightening across several developed economies.

Gold's price initially fell after the Fed decision, but then rebounded strongly. Spot gold surged 2.3% to $4,360.36 on September 17, and added another 0.5% on September 18. This unusual asymmetry in the market is a concern for gold investors, as it suggests that the market is reacting aggressively to every marginal decline in yields or the dollar while applying a much larger discount to the policy tightening responsible for the higher level of those yields.