Gold Faces Critical Test as Rate Expectations Shift

Gold has entered a critical period as markets reassess expectations of US Federal Reserve rate hikes. The metal, which had its strongest monthly performance since January with a 10% gain in August to near $4,450 per ounce, is facing pressure as it gives back ground in the first week of September.

The reversal is attributed to Fed Governor Christopher Waller's cautious tone, indicating support for holding rates steady if disinflation trends continue. This commentary pushed gold above $4,500 but was quickly undone by stronger-than-expected US August payrolls and a subsequent rise in the dollar and yields.

Gold has since been trading cautiously ahead of the September 16 FOMC decision, which carries a 60% probability of a 25 basis point hike. A hot Consumer Price Index (CPI) print on Friday could cement the case for a rate hike, pushing gold towards its support zone of $4,280 to $4,300.

However, beneath the near-term noise, the structural demand picture remains intact. Central banks have been buying gold, with the People's Bank of China extending its gold-buying streak to 22 consecutive months in August, and global gold-backed ETFs recording $17.1 billion in inflows in August.