Gold Defies Rate Hikes with Shift towards Credit Risk Hedge

Gold prices defied expectations by holding strong despite a 25 basis point interest rate hike from the Federal Reserve, rising 1.2% to $4,390.11 an ounce as of September 18.

The Fed's decision was widely expected, but gold investors appear to be shifting their focus away from monetary policy and towards credit risk, with gold now seen as a hedge against deteriorating government finances, stubborn inflation, currency uncertainty, and geopolitical turmoil.

Central banks have already grasped this shift, continuing to buy gold as they diversify their reserves in an increasingly fragmented global monetary system. Gold offers a reserve asset free of counterparty and sovereign credit risk, something that government bonds and sovereign currencies cannot provide.

Risks remain, with traders still seeing a 55% chance of another Fed rate hike in October. However, these look like short-term disturbances within a larger narrative: the Federal Reserve is fighting inflation, the bond market is struggling with debt, governments continue to spend, central banks continue to diversify their reserves, and geopolitical uncertainty shows no signs of fading.